FTX contagion spreads as traditional US bank is infected

• US bank Silvergate saw an opportunity in storing funds for cryptocurrency companies, including FTX 
• When FTX collapsed, Silvergate had to sell crypto assets at a loss as customers demanded their money back
• A run on the bank has seen US$12bn of digital assets reduced to $3.8bn since late November 2022
• Silvergate has decided against introducing its own digital currency because of “headwinds”

This week could see the collapse of a US conventional bank that, if it goes under, will have been brought low by its involvement in providing services to the cryptocurrency sector, which continues to suffer various convulsions that are causing the jerry-built edifice of the crypto sector to crumble further with every with fresh jolt.

The latest financial institution to be shaken to its foundations is Silvergate, a San Diego, California-based bank that has provided traditional banking services for 34 years and was doing OK as a smallish community bank until it perceived an opportunity in servicing cryptocurrency companies.

Now it has been tainted, perhaps terminally, by its relationship with the disgraced FTX platform and Alameda Research, the hedge fund set up by FTX founder and CEO Sam Bankman-Fried and run by Caroline Ellison, his ex-girlfriend. FTX was valued at $32bn as recently as late November last and Alameda was the root cause of its demise. Silvergate is now suffering what may be mortal damage because it facilitated and serviced the transfer of billions of dollars from FTX, a major bank client, to the hedge fund. The money was supposed to be routed back to FTX, but wasn’t.

Silvergate is a regulated Federal Reserve member bank and its stock is publicly traded on the New York Stock Exchange (NYSE). As contagion from the FTX scandal spread, worried Silvergate customers began to withdraw their crypto sector deposits. The disengagements and liquidations began comparatively slowly but were soon careering along like stampeding longhorns. At the start of the fourth quarter of 2022, Silvergate held $12bn in digital assets, but late last week it emerged that in the past few weeks more than $8bn had been withdrawn – a drop of about 68%. 

A Silvergate tweet from 5 January this year read: “As we enter a new year and continue to navigate the current environment, we are focusing our strategy to provide the most value-added solutions for our core digital asset customers.” A later press release said there is a “crisis of confidence across the ecosystem.” That’s some understatement.

On Friday it emerged that the sale at a loss of investors’ assets has cost Silvergate $760m. To put that sum in perspective, it is more than the entire profit the bank has made since 2013. In November 2021, when the crypto sector could do no wrong in the eyes of investors, the share price of Silvergate Capital, the bank’s parent, was $222: Today it is just under $12.20. Silvergate has stated that it holds $4.6bn in cash and other assets which, it claims grandiosely, “is in excess” of the $3.8bn remaining deposits. 

In one of several TV interviews, Silvergate’s CEO, Alan Lane, said: “At Silvergate bank, we built our platform purposefully to be able to withstand this type of stress... we carry cash and investment securities in excess of the amount of deposits that we hold on our balance sheet.” The bank also has $5.6bn of US government-backed debt and says it will sell “a portion” of the debt in “early 2023”. It is due to publish its complete quarterly and annual earnings reports on 17 January – if it lasts that long. 

In another TV interview, Mr Lane, remarkably bullish in the face of a rampaging grizzly, said:  “This is a deep crypto bear market, but it’s not going to zero.” The bank has also announced it will not now introduce its own digital currency because “there are significant headwinds to launching something in the near future”. That there are.

It is also making redundant the 200 staff who ran the cryptocurrency part of the bank’s operations. It says this 40% cull of the bank’s entire payroll will “account for the economic realities”. Last week, three highly important US federal financial agencies (the Federal Reserve, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency) issued a rare joint statement warning that all banks issuing or holding cryptocurrency are “highly likely to be inconsistent with safe and sound banking practices”.

Silvergate’s website, which was still up and running earlier today, says the bank is a “leading provider of innovative financial infrastructure solutions and services for the growing digital currency industry”. It continues, in true Southern California style, to affirm that its ethos is to “cultivate awesome” (an utterly meaningless phrase if ever there was one) and “embrace the entrepreneurial spirit with grit, passion, and resourcefulness”. It’s now learning what that PR verbiage means in practice.