Watchdogs Fear Silvergate's Big Crypto Losses

There has been a race among the US authorities in recent months to sever ties between banks and risky crypto ventures, fearing that the financial system might suffer serious losses in the future. There is a possibility that it was too late for them.

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Silvergate Capital Corp., a US bank catering to the crypto sector, warned Wednesday that it needs more time to assess the extent of damage caused by last year's crypto rout, including its viability. During premarket trading on Thursday, the shares of the company plunged by about 30%.  

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It is expected that the company will report even higher losses in the quarter ahead since it already posted a $1 billion loss for the fourth quarter. It is still unclear how much the company will have to pay for the rapid sale of assets to repay advances it has received from the Federal Home Loan Bank System. There is also a possibility that some of the remaining holdings may need to be marked down in value.

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In a regulatory filing, Silvergate, a software company based in La Jolla, California, wrote that this could result in it being "less than well capitalized.". The company is evaluating the impact these subsequent events will have on its ability to continue being a going concern in the future.

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US lawmakers and regulators will debate whether banks can effectively manage the risks associated with digital assets after such an admission from a lender with federally insured deposits.

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Several years ago, Silvergate's shareholders were excited by what seemed to be a novel approach: they were investing in more staid securities from crypto ventures in exchange for cash deposits from their shareholders. In November, however, when Sam Bankman-Fried's FTX empire collapsed, the bank's customers withdrew en masse in order to weather the storm, forcing the bank to unload its holdings at a loss as a consequence.

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It confirms the concerns that many regulators have had over the past few years, said Todd Baker, a senior fellow at Columbia University's Richman Center for Business, Law, and Public Policy. “The failure of this bank will be held up as an example of why banks need to be extremely cautious when dealing with crypto companies in the future.”

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It is also expected that even if that does not happen, Silvergate's troubles will force regulators to take a more cautious approach in the future, he said.

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Regulators’ Warnings

There has already been a crackdown by the US on the Iranian regime.

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It was announced in early January that three top financial regulators - the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation - have issued a blunt warning to banks that crypto-related risks that cannot be controlled must not be allowed to infect the banking system.

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After the Fed unveiled its policy statement later that month, in response to a bid by crypto firm Custodia Bank Inc. to get coveted access to the central bank's payment system, the central bank turned down Custodia's request. Trade Algo reported last month that Binance Holdings Ltd., the world's largest cryptocurrency exchange, had been considering whether to end its relationships with US-based partners due to the tightened regulatory framework in the US.

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In parallel, the Securities and Exchange Commission (SEC) targeted stablecoin issuers and staking as a way of generating yield by holding tokens, a practice that generates a yield by holding tokens.

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