What’s going on with Silvergate, the bank that props up the U.S. crypto market?

Earlier this week, cryptocurrency bank Silvergate announced that its exposure to FTX was limited to deposits. A U.S. bank that serves much of the domestic cryptocurrency industry said it did not lend or invest in FTX.

The bank’s statement helped calm the market as the stock rebounded slightly after losing nearly 50% of its value last month.

However, Silvergate isn’t out of the woods yet. The bank serves as the foundation for the US crypto market and has deep ties to the global industry. FTX’s bankruptcy proceedings may have had a negligible impact on its balance sheet right now, but the broader market downturn has created cracks in its foundations.

What is Silvergate and why is it important to the cryptocurrency industry?

The bank started targeting cryptocurrency companies as clients in 2013, becoming one of the few tradFi institutions serving the industry.

As the first to enter the market, Silvergate has been able to establish itself as a major pipeline facilitating the flow of fiat currency and the conversion of cryptocurrencies between exchanges. The company counts some of the largest US crypto companies among its clients: Coinbase, Kraken, Gemini, Genesis, Circle, Bitstamp, Paxos, and FTX all use the bank’s services.

Its importance to the industry lies in the license it holds in the United States. Silvergate is regulated by the Federal Deposit Insurance Corporation, the Federal Reserve System, and the California Department of Financial Protection and Innovation.

This kind of regulation has allowed banks to develop a real-time payment system called the Silvergate Exchange Network (SEN). It allows cryptocurrency exchanges and institutions to exchange dollars and euros in real time. This service was revolutionary at the time. No other bank had real-time payment capabilities to meet his 24/7 payment needs in the cryptocurrency industry.

As of September 2022, Silvergate had 1,677 customers use SEN and hold customer deposits worth approximately $12 billion.

Banks do not charge fees for using SEN and do not earn interest on customer deposits, so they can earn money by using deposits to invest in bonds or issue loans to earn money on spreads. to raise. The bank also offers Bitcoin-backed loans through SEN Leverage, but deposits are its main source of income.

Commitments to SEN leverage reached $1.5 billion in mid-October, up from a record $1.4 billion in June, according to Forbes.

Silvergate and FTX Fallout

In a statement issued last week, Silvergate said it had no lending relationship with FTX. But even so, his SEN leverage balance last month was less than his 10% of Silvergate’s total assets.

According to reports, only about $300 million had been drawn from these lines at the end of September, so there’s no need to worry about that amount increasing significantly. Even so, all of Silvergate’s loans are over-collateralized and it has not yet suffered losses or been forced to liquidate collateral, the company said in a mid-quarter update.

Besides $1.2 billion in FTX deposits, Silvergate has seen an additional deposit outflow of around $900 million over the past week.

While last week’s outflow wasn’t enough to cause market-wide panic, many worried that the contagion from FTX might spread to other creditors. Silvergate’s 10 largest depositors, including Coinbase, Paxos, Crypto.com, Gemini, Kraken, Bitstamp and Circle, accounted for about half of the bank’s deposits at the end of Q3.

Problems have already begun with Gemini, and withdrawals from the Gemini Earn Program were suspended earlier this week. The New York-based exchange cited issues with crypto lender Genesis, which acted as the program’s official lending partner. Genesis suspended client withdrawals a few days ago, saying its exposure to Three Arrows Capital meant it was facing hundreds of millions of dollars in losses from overleveraged hedge funds.

Gemini said its exchange funding has not been affected by the Genesis issue. Other big exchanges have tried to pre-empt rumors of bankruptcy by making their reserves public and promising to work to improve transparency in the future.

However, many players in the industry believe the worst is yet to come.

Multicoin Capital, a cryptocurrency venture fund that has heavily invested in FTX, said it does not expect the market to reverse anytime soon.and letter Addressing investors, the company said it expects the effects of the contagion from FTX to continue in the coming weeks.

“Many trading firms will be wiped out and closed, putting pressure on liquidity and volume across the crypto ecosystem. I look forward to it.”

Alder Lane Farm’s legendary shortseller Marc Cohodes believes Silvergate is not immune to infection.

and interview Cohodes said Hedgeye faces far more serious dangers than Silvergate is exposed to the public.

“If they lose all their depositors, there will be a bank run.”

Cohones believes banks could be in trouble if U.S. regulators start digging deeper into Silvergate and the trillion-dollar deals it facilitated. He said investigating the bank revealed little to no KYC or his AML processes, potentially questioning the bank’s involvement in what he called “FTX’s criminal activities.” said there is

Many have accused Cohones of manipulating the facts to bring down Silvergate’s stock. As a regulator, Silvergate is required to provide US regulators with quarterly financial statements outlining its assets and liabilities. The bank’s third-quarter statements show no risk of default, thanks to over-collateralized loans and healthy asset balances.

@AlderLane Eggs stupid or deliberately manipulative (for lack of a better word) $SI stock. Silvergate Capital is a bank holding company that operates federally regulated banking institutions. According to Q3 Form 10-Q, their total assets amounted to $15.5 billion, pic.twitter.com/62sjwVsmut

— Kashyap Sriram (@kashyap286) November 16, 2022

I’m having a problem with Silvergate.

Nevertheless, the list of unbanked companies continues to grow.

FalconX, one of the leading US crypto prime brokers, has announced that it will suspend the use of Silvergate SEN and wire transfers “immediately and until further notice.”

“This action is based on information published by Silvergate and is consistent with other market players,” the company said in an email to customers. “Otherwise, FalconX will continue to work as normal.”

The bank was also recently subpoenaed and found to be transferring $425 million to South American money launderers between its crypto bank accounts. The affidavit raised concerns, although we have yet to determine whether or not.

Remaining depositors may start withdrawing funds if further investigations into the bank are initiated. However, depositors probably won’t have a hard time withdrawing because their financial records show that the bank is fully solvent.

However, contagion from FTX could affect other Silvergate borrowers. Liquidating bitcoin collateral will put additional selling pressure on an already struggling market, triggering more liquidations when the value of the remaining collateral falls below the value of the loan.