Crypto-focused bank Silvergate plans to scale down after FTX’s blow

March 8 (Reuters) – Crypto-focused bank Silvergate Capital Corp (SI.N) said on Wednesday it planned to wind down operations and voluntarily liquidate after it was hit with losses following the dramatic collapse of crypto exchange FTX, causing its shares to drop 35% in after hours trading.

The decision to close the bank comes after the company warned last week it was evaluating its ability to operate as a going concern, revealing it had sold additional debt securities at a loss this year and that further losses mean the bank “less than well capitalized.”

The dire outcome for La Jolla, California-based Silvergate, one of the crypto industry’s favorite banks, shows the magnitude of the impact on the digital asset industry from the demise of FTX, which filed for bankruptcy in November after it had not covered customer withdrawals.

In a statement, Silvergate said the decision to wind down its bank was “the best way forward” in light of “recent industry and regulatory developments.” The run-down and liquidation plan includes full repayment of deposits, the bank added.

Silvergate reported a $1 billion loss for the fourth quarter as investors scrambled to withdraw more than $8 billion in deposits.

Several of the bank’s partners, including high-profile companies like Coinbase Global Inc (COIN.O) and Galaxy Digital, cut ties with Silvergate last week.

Silvergate has hired Centerview Partners LLC as financial advisor and Cravath, Swaine & Moore LLP as legal advisor, the bank said in a statement.

Founded in 1988, Silvergate ventured into crypto in 2013. The bank also had a mortgage warehouse business, but announced in December that it would wind down that division, citing the rising interest rate environment and decline in mortgage volumes.

Last week, Silvergate shut down the Silvergate Exchange Network, its crypto payment network and one of its most popular offerings. That network enabled round-the-clock transfers between investors and crypto exchanges, unlike traditional wire transfers, which can often take days to complete.

While the risk of contagion is minimal, the loss of the Silvergate Exchange Network is disappointing given that Silvergate has said it will repay depositors and has yielding loans, said Ram Ahluwalia, the CEO of Lumida Wealth, an investment advisor specializing in in digital assets.

“It’s more of a strategic loss of critical infrastructure for crypto,” he said.

The Federal Deposit Insurance Corp (FDIC) declined comment Wednesday when asked about the bank’s bankruptcy, except that it does not regulate the bank or the holding company. Bloomberg previously reported that the FDIC had spoken with Silvergate about ways to avoid a shutdown.

Federal prosecutors in Washington are investigating the company and its dealings with FTX and trading firm Alameda Research. In January, three US senators asked Silvergate for details about its risk management and FTX.

In a statement, the California Department of Financial Protection and Innovation, which oversaw Silvergate under a state charter, said it was reviewing the bank’s compliance with financial laws, as well as safety and soundness obligations, and was cooperating with its relevant federal counterparts.

In 2022, more than a trillion dollars in value was wiped out of the crypto sector, with rising interest rates exacerbating concerns of an economic downturn.

After rapid growth in 2020 and 2021, bitcoin – by far the most popular digital currency – fell by more than 60% last year, putting pressure on the digital asset industry.

Reporting by Hannah Lang in Washington and Anirban Chakroborti in Bengaluru; Additional reporting by Manya Saini in Bengaluru Edited by Maju Samuel and Matthew Lewis

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