Crypto-Friendly Bank Silvergate: Losing Major Customers and Approaching Dangerous Leverage Levels

Crypto-Friendly Bank Silvergate: Losing Major Customers and Approaching Dangerous Leverage Levels

Silvergate Bank, a cryptocurrency-friendly and one of the core banks in the crypto industry that helps tie the traditional financial industry to the crypto world went into serious trouble.

Silvergate's share price plummeted over 50% on March 2, 2023, after it disclosed suffered hugely from a run on deposits last year, triggered by the bankruptcy of its key client FTX. It revealed a $1 billion loss for the fourth quarter of 2022 alone, and this figure may be even revised higher as a Silvergate filing said. This could put the bank into a situation of “less than well-capitalized”. The bank has also delayed its annual filing with the Securities and Exchange Commission (SEC), raising concerns among investors.

Silvergate serves as a widely used important payment channel that facilitates the real-time transfer of money between crypto firms. It has a long history with the crypto industry and signed its first crypto customer back in 2014, at a time when crypto companies were finding it impossible to get a bank account.

Increased regulatory scrutiny

Silvergate's challenges arise in the midst of increased regulatory scrutiny on cryptocurrencies, specifically aimed at preventing any potential spillover of crypto-related risks into the traditional economy. This regulatory pressure has been likened to "Operation Choke Point 2.0", drawing parallels to a previous Obama-era policy of pressuring banks to refrain from servicing industries deemed morally questionable, albeit legal.

Silvergate has disclosed it was uncertain about its “ability to comply with the heightened regulatory scrutiny of banking institutions that provide products and services to the digital asset industry.”

Losing customers and dangerous leverage level

This uncertainty has led major customers of Silvergate including Coinbase, Paxos, Circle Internet Financial, and Galaxy Digital to cut ties with the bank. Moreover, the bank's leverage ratio, which measures its own capital as a share of its overall assets has dropped to slightly over 5%, nearing the well-capitalized cutoff of 5%, indicating that Silvergate is approaching dangerous levels.

If Silvergate were finally failing and leads to a bailout from the Federal Reserve to save it. It would be another painful event for the crypto industry and remind us of the original purpose of crypto and Bitcoin, an alternative financial system that would never need a bailout.

Policy and Regulation

FTX

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