Silvergate’s worsening crypto losses are fueling Watchdogs’ worst fears

(Bloomberg) — U.S. authorities have been working for months to cut ties between banks and high-risk crypto firms, fearing that the financial system could one day suffer serious losses. Maybe they were too late.

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In the strongest warning yet from a U.S. bank targeting the sector, Silvergate Capital Corp. 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 plummeted as much as 33% after the close of regular trading.

The company, which already reported a $1 billion loss for the fourth quarter, said that figure could rise higher. The company is still calculating the cost of selling assets quickly to repay Federal Home Loan Bank System advances. It may also be necessary to reduce the value of some remaining positions.

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

Read more: Silvergate collapses as bank studies its status as a going concern

Such an acknowledgment from a lender with federally insured deposits and more than $11 billion in assets will add to a debate among US lawmakers and regulators over whether banks can manage the risks of digital assets.

For a time, Silvergate excited its shareholders with what seemed like a new approach: sucking up cash deposits from crypto companies to invest in more sustainable securities. But when Sam Bankman-Fried’s FTX empire collapsed in November, the bank’s clients retreated en masse to weather the storm, forcing the bank to unload their holdings at a loss.

“It confirms the fears many regulators have had,” said Todd Baker, a 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 conservative when dealing with crypto companies.”

And even if that doesn’t happen, Silvergate’s trials will spark even more caution from regulators, he said.

Regulatory warnings

Indeed, an American performance has already begun.

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

Later that month, the Fed piled on with a policy statement when it accepted a bid from crypto firm Custodia Bank Inc. to gain coveted access to the central bank payment system. And last month, Bloomberg reported that Binance Holdings Ltd., the world’s largest cryptocurrency exchange, was considering ending its relationships with US partners amid the tougher regulatory regime.

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

Silvergate waded deeper into the US policy debate when it revealed in early January how it was stabilizing its balance sheet after selling billions in assets to pay depositors. Late last year, the company had $4.3 billion in short-term advances from the Federal Home Loan Bank, a program originally created under President Herbert Hoover to strengthen mortgage lending.

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

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

Market route

Shares of Silvergate fell more than 88% last year, first as crypto prices fell and later as FTX collapsed. The shares have been on a rollercoaster ride ever since — at one point fluctuating more than 50% in a single day — as investors struggled to gauge the company’s prospects for a revival.

The stock rose in mid-January as the company took steps to move forward. 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 broke the news that the Justice Department’s fraud unit is investigating the bank’s dealings with FTX and Alameda.

On Wednesday, Silvergate cited the Justice Department’s investigation and increased regulatory scrutiny as factors that could ultimately affect its financial results.

Its legacy in the crypto market and wider regulatory action may also complicate any attempt to find a buyer.

The bank’s problems could in turn affect cryptocurrencies.

The current predicament will make other banks all the more reluctant to partner with crypto ventures, resulting in a chilling effect on that sector, said Henry Elder, head of decentralized finance at digital asset manager Wave Financial.

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

–With help from Olga Kharif.

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