Silvergate Races to Secure $8.1 Billion Amid Crypto Market Crash

The collapse of crypto exchange FTX sparked a run on Silvergate Capital Corp., with the stock price falling 42.60%.

The bank was forced to sell assets at a steep loss to cover $8.1 billion in withdrawals.

Crypto-related deposits at Silvergate Bank plunged by 68% in the fourth quarter of 2020. To satisfy customer withdrawals, the bank was forced to liquidate some of its debt holdings. The $718 million loss from selling the debt far exceeds the bank's total profits since at least 2013.

Silvergate is a bank that specializes in serving companies in the cryptocurrency industry. It offers a platform called the Silvergate Exchange Network, which allows institutional investors to move money into and out of cryptocurrency trading platforms. The Exchange Network links the bank accounts of investors and exchanges, making it a convenient way to manage cryptocurrency investments.

The collapse of FTX and other companies controlled by its founder, Sam Bankman-Fried, in November sent shockwaves through the crypto market and Silvergate's stock prices tumbling.

Silvergate shares fell sharply on Thursday, losing 48% of their value. This marks a significant decline for the stock, which has fallen 85% in the last three months.

Silvergate was able to survive such a steep decline in deposits because it isn’t structured like most banks. It sold off much of its traditional banking operations and branches to focus on providing bank accounts to crypto exchanges and investors. Crypto-related deposits account for some 90% of the bank’s total, and it keeps almost all of its deposits in cash or easy-to-sell securities. This allows the bank to quickly and easily access the funds it needs to meet customer withdrawals, without having to rely on loans or other forms of borrowing.

At the end of the fourth quarter, Silvergate reported that it had more cash on hand than deposits, with $4.6 billion in cash and $5.6 billion in debt securities that could be quickly sold. The bank also saw an increase in daily average volume on its network in the fourth quarter.

The bank said that it is still dedicated to crypto and has the money to continue its "sustained period of transformation."

The executives said that the withdrawals were the result of a loss of confidence in crypto. Deposits dropped to as low as $3.5 billion in the fourth quarter, before rising again to end the quarter at $3.8 billion.

On a call with analysts Thursday morning, Silvergate executives said that customers who were withdrawing their money from the bank were doing so because they were moving it into other investments, like cryptocurrency or Treasurys. Even customers who are focused on digital currencies pulled their cash to invest in super-safe assets like Treasurys, executives said.

Chief Executive Alan Lane said that their customers have taken a huge pause.

Silvergate plans to reduce its operations to weather the current economic conditions. The bank has laid off 40% of its staff and postponed plans to launch its own digital currency, writing off $196 million it spent on acquiring the technology that Facebook had developed for its unsuccessful attempt to create a crypto-based payments network.

Silvergate has come under intense scrutiny for its relationship with FTX and Mr. Bankman-Fried's crypto-trading firm, Alameda Research LLC. The companies came under fire in November after it was revealed that Alameda had used FTX customer funds to finance risky bets.

Mr. Bankman-Fried has blamed the use of customer funds on outdated systems and risk-management failures. In its early days, he has said, FTX didn't have a bank account, so customers looking to trade on the exchange wired money to Alameda's bank accounts. Some of that money appears to have been transferred to an account at Silvergate.

Silvergate is reviewing transactions between FTX and Alameda and has suggested that it was not aware that the funds being transferred to Alameda were intended for FTX.

At Silvergate, we understand the concerns that have been widely expressed about FTX apparently directing its customers to wire money to Alameda's accounts. In a letter to lawmakers who had questioned the bank's relationship with Mr. Bankman-Fried's companies, Mr. Lane wrote that we share these concerns.

The recent decline in the value of cryptocurrencies has led to questions about the viability of banks' business models. A group of federal regulators has warned banks against becoming too exposed to the cryptocurrency market.

According to S3 Partners, Silvergate's shares are heavily shorted and the trade has been a profitable one, with shorts up more than $400 million in the past year.

Silvergate will release its full fourth-quarter results later this month.