Silvergate’s Big Crypto Losses Feed Watchdogs’ Worst Fears

(Bloomberg) — For months, US authorities have been racing to sever ties between banks and risky crypto ventures, worried the financial system could someday suffer serious losses. They may have been too late.

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In the starkest warning yet by a US bank catering to the sector, Silvergate Capital Corp. said Wednesday it needs more time to assess the extent of damage to its finances stemming from last year’s crypto rout — including whether it can remain viable. The shares plunged about 30% in premarket trading on Thursday.

The firm, which already reported a $1 billion loss for the fourth quarter, said that figure could climb higher. The company is still tallying the cost of rapidly selling assets to repay advances from the Federal Home Loan Bank System. It may also need to mark down the value of some remaining holdings.

That could result in “being less than well-capitalized,” La Jolla, California-based Silvergate wrote in a regulatory filing. “The company is evaluating the impact that these subsequent events have on its ability to continue as a going concern.”

Read more: Silvergate plunges as bank studies its status as ‘going concern’

Such an admission by a lender with federally insured deposits and more than $11 billion in assets will add to a debate among US lawmakers and regulators over whether banks can manage the risks associated with digital assets.

For a time, Silvergate excited its shareholders with what seemed like a novel approach: soaking up cash deposits from crypto ventures to invest in more staid securities. But when Sam Bankman-Fried’s FTX empire collapsed in November, the bank’s customers withdrew en masse to weather the storm, forcing it to unload holdings at a loss.

“It confirms the fears that many regulators have had,” said Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy. “If this bank fails, it’s going to be held up as an example of why banks should be extremely conservative in dealing with crypto companies.”

And even if that doesn’t happen, Silvergate’s travails will stoke even greater caution on the part of regulators, he said.

Regulators’ Warnings

Indeed, a US crackdown has already begun.

In early January, three top financial regulators — the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — issued a blunt warning to banks that crypto-related risks that can’t be controlled shouldn’t be allowed to infect the banking system.

Later that month, the Fed piled on with a policy statement as it turned down a bid by crypto firm Custodia Bank Inc. to get coveted access to the central bank’s payment system. And last month, Bloomberg reported that Binance Holdings Ltd., the world’s largest cryptocurrency exchange, was mulling whether to end its relationships with US partners amid the stricter regulatory regime.

Meanwhile, the Securities and Exchange Commission targeted stablecoin issuers and so-called staking, a practice of generating yield by holding tokens.

Silvergate waded deeper into the US policy debate when it revealed in early January how it was stabilizing its balance sheet after selling billions in assets to pay depositors. By the end of last year the firm held $4.3 billion in short-term Federal Home Loan Bank advances, a program originally set up under President Herbert Hoover to bolster mortgage lending.

The bank said Wednesday it sold more securities in January and February to pay off those advances, potentially exacerbating its losses.

“All advances were at all times fully collateralized while they were outstanding,” the Federal Home Loan Bank of San Francisco said in a statement Wednesday.

Market Rout

Silvergate’s stock tumbled more than 88% last year, first as crypto prices slid and later as FTX collapsed. The shares have been on a roller coaster ever since — at one point swinging by more than 50% in a single day — as investors struggled to gauge the company’s prospects for reviving.

The stock rose in mid-January as the company outlined steps for moving on. But at the end of the month, a bipartisan group of US senators accused Silvergate of being “evasive” about the extent of its ties to FTX and Bankman-Fried’s Alameda Research investing arm. And days later, Bloomberg broke the news that the Justice Department’s fraud unit is looking into the bank’s dealings with FTX and Alameda.

On Wednesday, Silvergate listed the Justice Department’s probe and increased regulatory scrutiny among factors that could ultimately affect financial results.

Its legacy in the crypto market, and the broader regulatory crackdown, could also complicate any efforts to find a buyer.

The bank’s troubles, in turn, might have implications for cryptocurrencies.

Its current predicament will make other banks all the more reluctant to work with crypto ventures, resulting in a chilling effect on that industry, said Henry Elder, head of decentralized finance at digital-asset manager Wave Financial.

“They were the crypto bank,” Elder said. “You are certainly not going to see anyone come out as a crypto bank until there’s more clarity.”

–With assistance from Olga Kharif.

(Updates with premarket trading in second paragraph.)