Shares of Silvergate Capital, a crypto-focused bank, fell by 46% to $11.76 on Thursday after the company announced plans to lay off 40% of its staff, or approximately 200 employees.
Silvergate has also halted its plans to launch a digital currency and written off the $196 million related to its acquisition of the technology and assets of Diem Association from Facebook parent Meta Platforms. Diem, formerly known as Libra, was Facebook’s attempt to create a stablecoin, a cryptocurrency pegged to the U.S. dollar or other “stable” asset.
In a filing with the U.S. Securities and Exchange Commission, Silvergate CEO Alan Lane stated that the company took steps to maintain cash liquidity and satisfy potential deposit outflows in response to the rapid changes in the digital asset industry during Q4. Despite these measures, Silvergate saw an outflow of $8.1 billion in digital asset deposits during the quarter and had to sell $5.2 billion in debt securities, incurring a loss of $718 million. Deposits from customers declined from $11.9 billion in Q3 to $3.8 billion in Q4.
Silvergate is Affected by Its Customers’ Implosion
The decline in deposits and need to raise cash through the sale of debt securities can be attributed in part to the collapse of crypto exchange FTX, a Silvergate customer, which raised concerns about the stability of the digital asset industry and led to a “crisis of confidence” in the sector. In addition to this, the bank reported that $150 million of its deposits were held by bankrupt customers at the end of December.
Macro headwinds and the collapse of crypto firms like Celsius Network and FTX led to a significant downturn in the industry in 2022, causing several high-profile bankruptcies and a crisis of confidence in the industry. As a result, many industry participants have adopted a risk-off approach. Despite these challenges, the Silvergate Exchange Network continued to operate with an average daily trading volume of $1.3 billion in Q4, up from $1.2 billion in Q3.
Headquartered in La Jolla, California, Silvergate is a Federal Reserve member bank that specializes in providing financial infrastructure solutions and services for the digital currency industry. The company leverages its technology platform and management team’s expertise to develop solutions for many of the largest fintech and digital currency companies and investors around the globe.
Silvergate’s solutions are grounded in its commitment to regulatory compliance and its proprietary approach to it. Founded in 1988, Silvergate has consistently been profitable for over two decades and is publicly traded on the NYSE (SI). It has over 1300 digital currency and fintech clients as of the 3rd quarter of 2021.
Silvergate Capital operates the Silvergate Exchange Network (SEN), which is a 24/7 digital currency exchange platform that enables customers to buy and sell digital currency, including Bitcoin, Ethereum, and USDC. The SEN platform is designed for institutional investors and is intended to provide a secure and efficient means for digital currency trading. It allows institutional investors to move money in and out of trading platforms.
Retail customers use traditional banks and centralized exchanges. Big institutions and crypto companies use Silvergate. Below is a visual of how Silvergate acts as the backbone of the crypto space.
What Happens if the Backbone is Broken?
Silvergate was able to withstand the large decrease in deposits because it is structured differently from most banks. Crypto-related deposits make up around 90% of the bank’s total deposits, and it mostly keeps its deposits in cash or securities that can be easily sold. This is a sort of stress test. We cannot clearly say that the bank passed, but it is still standing at the time of writing.
The drama surrounding Silvergate is something to watch out for. If it fails, then it will drag the whole industry with it. A broken backbone is fatal. It will further exacerbate the lack of confidence on the crypto market. It is possible to survive, but the recovery will be a hard battle.
Featured Photo from Unplash