Silvergate, a crypto-friendly bank, is facing a life-or-death situation with a $1 billion loss and regulatory issues.

Original title: "Loss of $1 billion, regulatory entanglements, crypto-friendly bank Silvergate caught in a 'life and death situation'"

Original source: BitpushNews

After Silvergate Bank (SI), a crypto-friendly bank, announced that it was unable to submit its annual financial report on time and is evaluating its ability to continue operating, the company's stock price plummeted nearly 60% on Thursday, hitting a 52-week low during trading and closing at $5.72, a drop of over 97% compared to its high of $219.75 in November 2021.

业务暴亏，监管找上门

translates to

Business losses, regulatory intervention

Unlike FTX, BlockFi, Celsius, Voyager, and other cryptocurrency companies that went bankrupt last year, Silvergate, headquartered in California, is a traditional federal insurance loan institution that positions itself as a gateway to the cryptocurrency field. It accepts deposits from cryptocurrency exchanges and traders, and has established its own cryptocurrency settlement payment network. It is an important partner for cryptocurrency companies that want to connect with traditional banking systems.

However, the collapse of its important client, Sam Bankman-Fried's FTX empire, and the ongoing crypto bear market have dealt a heavy blow to the company. Last month, the bank announced a net loss of nearly $1 billion, and customer deposits decreased by approximately $14 billion in the fourth quarter of 2022. Earlier this year, the company laid off 40% of its employees and subsequently suspended payment of preferred stock dividends to support cash flow. 

In Wednesday's regulatory filing, Silvergate stated that it was unable to submit its annual 10-K report to the US Securities and Exchange Commission (SEC) on time because it needed "additional time" for its independent accounting firm to complete certain audit procedures.

Silvergate has also warned in a forward-looking statement that it may face inquiries from banking regulators and the US Department of Justice, and its ability to "continue as a going concern" may be affected in the next year.

Compared to previous reports, in late January, US senators from both parties urged the company to provide answers on whether it knew that its customer FTX was misusing customer funds. A Reuters report in February stated that a Silvergate account controlled by Binance US transferred millions of dollars to another company controlled by Binance CEO Zhao Changpeng.

As for its own risks, Silvergate mentioned "strengthened regulatory scrutiny of banking institutions that provide products and services to the digital asset industry," private litigation, as well as congressional investigations, banking regulatory agency investigations, and Department of Justice investigations.

In Wednesday's announcement, the bank also stated that it sold additional debt securities beyond previous expectations in January and February to repay interest on a $4.3 billion loan obtained from the Federal Home Loan Bank (FHLB) of San Francisco, and is expected to record more losses than previously disclosed.

Cryptocurrency news media Protos reported in January that both Silvergate and Signature are utilizing FHLB loans, collectively receiving up to $15 billion in loans.

Morgan Stanley and other Wall Street analysts have downgraded the rating of Silvergate stock.

Morgan Stanley analysts downgraded the stock from neutral to sell and withdrew its price target in a report released on Thursday, calling the situation "very unusual" and adding that "Silvergate's 'run' seems to be driven by a combination of factors (1) Trust in the entire system is being shaken due to the collapse of previously trusted participants (such as FTX), and (2) concerns from short sellers (negative sentiment mainly on social media Twitter)."

According to data analysis firm S3 Partners, it is estimated that 82% of Silvergate's total circulation is shorted, making it the most shorted US stock in circulation.

Encryption companies have cut ties with it one after another

After the announcement was released, many encryption companies in the currency circle quickly spoke out to distance themselves from it.

Coinbase, Paxos, Galaxy Digital, Gemini, BitStamp, Crypto.com, and Circle have all issued statements stating that they have terminated their business relationships with Silvergate Bank.

Coinbase announced on Thursday that it will no longer accept payments from Silvergate or initiate payments to Silvergate, citing recent developments and a high level of caution. The exchange added that its exposure to the bank is "minimal," and that cash transactions for institutional clients will be facilitated through other banking partners.  

The cryptocurrency financial services company Galaxy Digital has also stated that it has stopped accepting or initiating transfers to Silvergate, adding that it has "no significant risk exposure" to the bank. MicroStrategy, the largest holder of bitcoin among enterprises, said that if Silvergate were to face bankruptcy, its bitcoin loans with Silvergate would not be due until the first quarter of 2025 and would not be repaid early.

Encryption market remains stable

This is one of the first cases where the volatility of encryption has spread to mainstream banking systems, and it has long been a concern for US regulators and encryption skeptics.

StockCharts.com's senior technical analyst, Julius de Kempenaer, commented that "In summary, Silvergate's crisis is serious and it is another victim of the inability to cope with the internal explosion of cryptocurrency companies, but its current impact on the market seems limited."

According to terminal data from BiTu, unlike last November's FTX crash that caused Bitcoin to plummet to a multi-year low, the Silvergate crisis had almost no impact on the cryptocurrency market. On Thursday, the price of Bitcoin remained in the range of around $23,000.

De Kempenaer pointed out that Bitcoin and Ethereum have shown relatively stable performance in dealing with the Silvergate crisis: "Currently, ordinary financial institutions do not seem to be affected, and they are unlikely to be harmed at this stage."

De Kempenaer said: "If they (cryptocurrency traders) were really panicking, we should have seen it in the price by now. Perhaps things will get worse in the future, but for now, the market seems to be able to digest this news without too much trouble."

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