Silvergate Pulls $8 Billion in Funds

Silvergate has been one of the financial firms affected by the FTX contagion. The US-based bank has invested heavily in the cryptocurrency sector. Still, last year’s bear market and the collapse of several crypto firms have put the bank in a tight position. Silvergate customers have withdrawn over $8 billion worth of crypto deposits from the crypt lending company.

Silvergate customers withdraw over $8 billion

The majority of withdrawals at Silvergate were reported in the last quarter of 2022. This was caused by the shock resulting from the collapse of FTX, which was once one of the largest cryptocurrency exchanges by trading volumes.

Silvergate has significant exposure in the cryptocurrency market and has been forced to take harsh measures to protect the firm’s balance sheet. On Thursday, the firm said it had to sell $5.2 billion worth of crypto assets for cash to accommodate the low deposit levels and sustain a highly liquid balance sheet. The company made a loss of $718 million from the sale.

Alan Lane, the chief executive at Silvergate, opined that the volatility across the digital asset industry in the fourth quarter of 2022 had forced Silvergate to take steps that would improve the firm’s liquidity to meet the deposit outflows. “We currently maintain a cash position in excess of our digital asset related deposits,” Lane added.

Silvergate attributed the high withdrawal volumes to the reduced confidence in the digital asset space, resulting in many looking for ways to lower their exposure to digital assets. Silvergate is a bank based in California, and it is listed on the New York Stock Exchange. The bank’s shares have plunged by nearly 90% over the past year.

Exposure to the crypto space

Silvergate was founded as a small community bank in the United States. However, the bank restructured its operations during the crypto bull market, and it became one of the traditional financial firms that have invested heavily in the digital asset industry.

However, last year, the cryptocurrency industry did not perform as expected, as digital asset prices plunged. Firms with significant exposure in the sector were affected as customers fled the market to avoid more losses.

One of the largest clients at Silvergate was Alameda Research, a crypto hedge fund founded by Sam Bankman-Fried. Alameda is being attributed to the fall of FTX. Alameda had an account at Silvergate bank that was used by the FTX exchange to receive internal wire transfers. However, the funds remained in Alameda accounts and were not transferred to FTX as intended.

The controversial relationship between FTX and Alameda created an $8 billion hole in FTX’s balance sheet. The exchange failed to process all customer withdrawals after a bank run on the exchange in November 2022.

The intense volatility in the digital asset space has seen several federal financial agencies in the United States issue a statement warning banks against engaging in the issuance and custody of cryptocurrencies, as this could violate safe and sound banking practices.

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