Crypto bank Silvergate faces Troubles related to Crypto Deposits

Crypto-friendly Silvergate bank is not healthy financially; the reasons are its crypto-related deposits. The harsh crypto winter and its alleged involvement in FTX-saga had cost the bank dearly. Rumors kept surfacing about the existence of a bank in the future. It has recently discontinued its Silvergate Exchange Network.

Silvergate: Can it Survive?

The crypto-friendly bank of San Diego, Silvergate, had customized itself to facilitate deposit accounts, fund transfers, banking infrastructure and a real-time payment network for the crypto industry. Once, it was a go-to for everyone but has suffered considerable losses in January and February 2023. These were attributed to sales of debt securities which assisted its crypto-related deposits.

The losses are bound to pressure the FDIC-insured bank’s regulatory capital reserves. If this happens, a situation could occur where the bank cannot be capitalized as required. This was revealed in a Wednesday filing with the financial watchdog, the Securities and Exchange Commission (SEC).

Silvergate faces regulatory challenges due to its exposure to FTX, and other bad factors have considerably impacted its ability to continue in the market. They are reevaluating their strategies and are very concerned about the next twelve months from the financial statement issuance.

Silvergate might miss the deadline

Silvergate is to file its annual report with the SEC; the last date is March 16, 2023. The bank said it might be able to meet the deadline. The reason was their prior commitment to regulatory inquiries and investigations for their relation with FTX, SBF and Alameda. Also, the independent accounting firm for the bank needs extra time to audit before filing the annual report.

Disclosure Further affected their financial health

Since this information came out, the stocks plummeted to $5.77 at the time of writing, soaring in the skies during the crypto boom at $158. As the bank is associated and partnered with many crypto entities, they are trying to reassure their customers that they would not be affected by the troubles of the Silvergate bank.

Every entity associated with the crypto bank is taking additional measures to curtail the losses. Bybit halted USD bank transactions, and Paxos Trust has discontinued the Silvergate Exchange Network and wire transfers. Bitstamp also did the same thing. Crypto.com, Gemini and Coinbase have also distanced themselves from Silvergate.

Cryptobanks – The last line of Defense

Authorities are concerned about keeping the crypto industry, and traditional finances separate, as an amalgamation might be disastrous. In January 2023, three major US banking regulators, the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency, warned financial institutions about crypto’s liquidity risks.

The authorities are afraid that it could be disastrous if the volatility of crypto reaches the traditional finance realm. Consider an FTX like the incident in the traditional banking scenario; it might have pushed the world into recession. That’s why these agencies are pushing the banks to perform strict due diligence and monitor crypto entities with accounts.

In their SEC filing, the bank accepted that they are facing the aftermath of crypto winter and market conditions. They also have to face at least three lawsuits.

Silvergate: What if the bank fails?

Authorities are concerned about what the bank’s failure would mean. Some say its failure would be a great example, reinforcing why banks must be extremely conservative when dealing with crypto.