How Silvergate rushed to cover $8bn in withdrawals as FTX crashed

The collapse of crypto exchange FTX sparked a run on Silvergate Capital, forcing the bank to sell assets at a steep loss to cover some $8.1bn in withdrawals.

Crypto-related deposits plunged 68% in the fourth quarter, the bank said in an early release of some quarterly results. To satisfy the withdrawals, Silvergate liquidated the debt it was holding on its balance sheet. The $718m it lost selling the debt far exceeds the bank’s total profits since at least 2013.

The bank has laid off 40% of its staff, or about 200 employees, and said it would pare back its businesses. It shelved a plan to launch its own digital currency, writing off the $196m it spent buying the technology that Facebook had built in its failed attempt to start a crypto-based payments network.

Silvergate caters to companies in the crypto business, taking their deposits and operating a network that links investors to crypto exchanges. FTX and other companies controlled by its founder, Sam Bankman-Fried, accounted for about $1bn of the bank’s deposits.

Their November collapse rattled the crypto market and sent Silvergate’s stock down sharply.

Silvergate was able to survive such a steep decline in deposits because it isn’t structured like most banks. It sold off much of its traditional banking operations and branches to focus on providing bank accounts to crypto exchanges and investors. Crypto-related deposits account for some 90% of the bank’s total, and it keeps almost all of its deposits in cash or easy-to-sell securities.

The bank said it remains committed to crypto and has the funding to handle a “sustained period of transformation.”

READ National Crime Agency launches crypto unit to crack down on digital asset fraud

At the end of the fourth quarter, Silvergate said it had more cash on hand, $4.6bn, than its $3.8bn in remaining deposits. And it held another $5.6bn in debt securities like US Treasurys that could be sold quickly. Daily average volume on Silvergate’s network rose in the fourth quarter, the bank said.

“While Silvergate is taking decisive action to navigate the current environment, its mission has not changed,” the bank said in a statement. “Silvergate believes in the digital asset industry.”

Silvergate has faced intense scrutiny over its relationship with Bankman-Fried’s companies, and the crypto market’s implosion has raised questions about the viability of the bank’s business model. A group of federal regulators earlier this week warned banks against being too exposed to the crypto market.

Silvergate’s stock is down more than 70% in the last three months, and its shares are heavily shorted. The trade has been a profitable one, with shorts up to more than $400m in the last year, according to S3 Partners.

The stock had rallied on January 4, rising 27%, its best percentage gain since 2020.

The bank said the withdrawals were the result of a crypto crisis of confidence. Deposits dropped to as low as $3.5bn in the fourth quarter, before rising again to end the quarter at $3.8bn.

Silvergate plans to report full fourth-quarter results later this month.

Write to David Benoit at [email protected]

This article was published by The Wall Street Journal, part of Dow Jones


Leave a Reply

Your email address will not be published. Required fields are marked *