Silvergate Bank Dumps Assets and Nearly Half of Its Staff

Silvergate Bank markets itself as banking for the future, but its recent circumstances make it unclear whether the bank will have a future at all. Customers are fleeing from the institution, which has impacted its stock price and forced the bank to scramble to keep up. The rapid descent into the red marks tough times ahead for Silvergate, which is already putting plans on hold and cutting employees in an attempt to remain afloat.

Deposit outflow: Silvergate Capital is regulated by the FDIC, but it is not the same as traditional lenders. It serves entrepreneurs in unique and niche industries, and to better do that, it created a payments network called the Silvergate Exchange Network (SEN). SEN allows real-time transactions using US dollars, which has proven useful for crypto traders and exchanges.

• The real-time transactions helped with crypto because it goes 24/7 while the US banking system does not.
• Silvergate allowed crypto exchanges and traders to use SEN for free since it brought in a large number of deposits.

However, with the state of crypto and the economy in 2022, deposits started to flood out of the bank. The total in deposits went from nearly $12 billion in the third quarter to about $3.8 billion toward the end of the fourth quarter, for a total outflow of $8.1 billion in digital-asset deposits.

Forced to sell bonds at big losses: The major outflow required Silvergate to sell assets to cover it. However, Silvergate is largely liquid, and it mostly invests in government-backed bonds, which have taken a dive due to high interest rates. Due to that, when the bank sold $5.2 billion of securities, it took a $718 million loss.

It might not be over, either. The bank might be forced to sell further securities, which could mean an additional loss of hundreds of millions.

Decline in stock price and employee count: A dip in stock price was expected for most companies in 2022, but Silvergate plunged 46% because of the outflow of deposits. Moreover, to cut costs, the bank has been forced to cut its staff by about 200 people, which accounts for around 40% of its entire workforce.

Halted plans: Silvergate acquired Diem assets from Meta Platforms in 2022 and hoped to launch its own digital currency. However, management at the bank now believes “that the launch of a blockchain-based payment solution by Silvergate is no longer imminent.” It has since written off $196 million of intangible assets from the transaction.

The relationship to FTX: The collapse of FTX is one of the main causes of the deposit outflow. Not only was it a major client of SEN, but the consequences of the exchange’s bankruptcy impacted the entire crypto industry. It led to other companies going bankrupt, and it caused many crypto traders to pull away.

Additionally, FTX assets held by Silvergate and other banks have recently been seized by federal authorities. The impact of that is yet to be seen, but Silvergate having its name tied to FTX and Sam Bankman-Fried in any way is not a good thing for the crypto-focused bank.

An uncertain future: Whether Silvergate will survive is uncertain. It managed to stay afloat despite the major departure of deposits, but it is highly dependent on the crypto industry, which is unstable at best. Moreover, its relationship with FTX could potentially spell trouble with regulators.

There is also a potential class action on the way, which could disturb the already shaky bank as it carries allegations of money laundering by Silvergate customers.