Silvergate Shares Slump 60% in Two Days As Crypto Firms Scramble To Sever Ties

Crypto-friendly Bank Says It’s “Less Than Well Capitalized”

The fallout from last year’s CeFi blow-ups may still be ricocheting throughout the web3 sector, with questions now swirling regarding the solvency of Silvergate Bank, sending the company’s shares into free fall.

Silvergate’s problems began on Wednesday when documentation Silvergate submitted to the U.S. Securities and Exchange Commission revealed it will not file its annual 10-K report for the 2022 financial year until after March 16, citing pending regulatory investigations into its operations.

The firm said it cannot meet the deadline due to several factors that may impact the firm’s financial reporting, including “restrictions on the Company’s business, resulting from various litigation, regulatory and other inquiries and investigations [from] banking regulators, congressional inquiries and investigations from the U.S. Department of Justice.”

In February, Bloomberg reported that the U.S. Justice Department’s fraud unit was looking into Silvergate’s dealings with the insolvent FTX exchange and its sister trading firm, Alameda Research, citing anonymous sources. 

“The Company is currently analyzing certain regulatory and other inquiries and investigations that are pending,” Silvergate said. 

The markets responded with a violent sell-off, with Silvergate’s shares tanking 60% and hitting new all-time lows since trading opened on Wednesday. 

Silvergate Bank is a California-based financial institution that was founded in 1988 and started to serve the nascent cryptocurrency sector in 2013. The company’s shares rocketed during the last crypto bull run, surging nearly 2,700% from $8.25 in April 2020 to a high of $220 in November 2021.

Mounting Losses

The firm also said it is evaluating the impact of losses resulting from debt securities sales in January and February of this year. “These additional losses will negatively impact the regulatory capital ratios of [Silvergate Bank], and could result in the Company and the Bank being less than well-capitalized.”

Silvergate also said the viability of its digital asset business could be impacted by “the substantial volatility in the digital asset industry [and] the company’s ability to comply with the heightened regulatory scrutiny of banking institutions that provide products and services to the digital asset industry.”

The company has warned that it is assessing “its ability to continue as a going concern.”

Crypto Firms Abandon Ship

Crypto firms that had partnered with Silvergate scrambled to sever ties with the bank on Thursday.

Coinbase, the leading U.S.-based crypto exchange, tweeted that it “is no longer accepting or initiating payments to or from Silvergate.” The firm added that it has minimal corporate exposure to Silvergate, saying that all client funds are held with FDIC-insured U.S. banks.

Circle, the company behind the USDC stablecoin, said it is now “unwinding certain services” with Silvergate and notifying affected customers. All other Circle services, including USDC, are operating as normal.

Gemini, the exchange founded by the Winklevoss twins, said it is monitoring the situation at Silvergate and has no customer funds or funds related to its GUSD stablecoin held with the firm. It also ceased processing withdrawals and deposits through Silvergate.

Stablecoin issuer Paxos and centralized exchange Bitstamp have similarly said they have no material exposure to Silvergate and have suspended transfers involving the firm. Crypto.com, another exchange, also suspended payment services relating to Silvergate.

Paolo Adroino, the CTO of leading centralized stablecoin issuer, Tether, tweeted that the firm has no exposure to Silvergate.

On the same day, Bloomberg reported that Galaxy Digital, a cryptocurrency services firm, and CBOE, a U.S.-based equity market operator, have also suspended processing payments via Silvergate.

MicroStrategy Loan

MicroStrategy, the Bitcoin-heavy business intelligence firm formerly led by Michael Saylor, said it has a loan from Silvergate that is not due until the first quarter of 2025. It went on to assure investors that repayments will not accelerate if Silvergate becomes insolvent or bankrupt, adding that the Bitcoin it provided as collateral is not custodied with Silvergate.

However, not everyone is convinced by the assurances of the sector’s top CeFi firms.

“Everyone telling us they aren’t exposed, when it doesn’t really service retail, or much outside of crypto, and there were still $3.5B in deposits last quarter,” tweeted DeFi investor Adam Cochran. “Who the hell *IS* exposed?”

“Everyone also said they had no exposure to 3AC,” replied harry.eth, a security researcher at MetaMask, referring to similar statements made after crypto hedge fund Three Arrows Capital collapsed last year.