Silvergate’s Big Crypto Losses Fuel Watchdogs’ Worst Fears

(Bloomberg) — For months, US authorities have raced to sever ties between banks and risky crypto firms, fearing the financial system could one day suffer serious losses. They may have arrived too late.

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In the most stern warning to date from a US bank serving the sector, Silvergate Capital Corp. said Wednesday that it needs more time to assess the extent of the damage to its finances from last year’s crypto rout, including whether it can remain viable. Shares plunged about 30% in premarket trading on Thursday.

The company, which has already reported a $1 billion loss for the fourth quarter, said that figure could climb. The company still accrues the cost of selling assets quickly to repay advances from the Federal Home Loan Bank System. It may also be necessary to write down the value of some remaining assets.

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

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

Such an admission from a lender with federally insured deposits and more than $11 billion in assets will add to the debate among U.S. lawmakers and regulators over banks’ ability to manage the risks associated with digital assets.

For a while, Silvergate enthused its shareholders with what seemed like a novel approach: absorbing cash deposits from crypto firms to invest in more stable securities. But when Sam Bankman-Fried’s FTX empire collapsed in November, the bank’s customers retreated en masse to weather the storm, forcing him to offload his holdings at a loss.

“This confirms the fears of many regulators,” said Todd Baker, senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy. “If this bank fails, it will be held up as an example of why banks should be extremely careful in their dealings with crypto companies.”

And even if that doesn’t happen, Silvergate’s setbacks will prompt even greater caution from regulators, he said.

Regulator warnings

Indeed, a US crackdown has already begun.

In early January, three of the main financial regulators – the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. – issued a stark warning to banks that crypto-related risks that cannot be controlled should not be allowed to infect the banking system.

Later that month, the Fed issued a policy statement declining an offer from crypto firm Custodia Bank Inc. for coveted access to the central bank’s payments system. And last month, Bloomberg reported that Binance Holdings Ltd., the world’s largest cryptocurrency exchange, was considering whether to end its relationship with its US partners under a stricter regulatory regime. .

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

Silvergate deepened the US political debate when it revealed in early January how it was stabilizing its balance sheet after selling billions in assets to pay depositors. At the end of last year, the company held $4.3 billion in short-term advances from the Federal Home Loan Bank, a program originally introduced under President Herbert Hoover to bolster mortgage lending.

The bank said on Wednesday it sold more securities in January and February to repay those advances, potentially deepening its losses.

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

Market rout

Silvergate stock fell more than 88% in the last year, first when crypto prices fell and then when FTX crashed. Shares have been on a roller coaster ever since – at one point swinging more than 50% in a single day – as investors scrambled to assess the prospects for the company’s recovery.

The stock rose in mid-January as the company outlined the steps to 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 investment arm. And days later, Bloomberg reported that the Justice Department’s Fraud Unit was reviewing the bank’s dealings with FTX and Alameda.

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

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

The bank’s problems, in turn, could have implications for cryptocurrencies.

Its current situation will make other banks all the more reluctant to work with crypto firms, which will have a chilling effect on this industry, said Henry Elder, head of decentralized finance at digital asset manager Wave Financial.

“They were the crypto bank,” Elder said. “You definitely won’t see anyone marketing themselves as a crypto bank until there’s more clarity.”

–With the help of Olga Kharif.

(Updates with premarket exchanges in second paragraph.)

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