In recent years, the cryptocurrency industry has been booming. Many small banks have embraced the rapidly growing industry, ignoring the risks involved. With the collapse of FTX, the instability of Silvergate Bank, and Signature Bank reducing its partnership with cryptocurrency clients, both banks and cryptocurrency startups are facing difficulties.
On March 2nd, Silvergate announced that it would delay submitting and explaining its annual financial report and stated that it would still need two weeks to complete its fiscal year report for 2022. Coincidentally, in a forward-looking statement, Silvergate warned that it may face inquiries from banking regulators and the US Department of Justice, and that its ability to continue operating may be affected in the next year.
The news caused a ripple effect, with Silvergate's stock price falling over 30% in after-hours trading. Even worse, on Thursday, Silvergate's stock price fell to $2.84, a drop of 42.16%, and its current market value is only $89.91 million. This news triggered a chain reaction, causing the entire cryptocurrency market to plummet, with Bitcoin falling below $20,000 and a 24-hour drop of 7%.
Although Silvergate Bank announced that it would orderly wind down its operations and voluntarily liquidate according to applicable regulatory procedures, including fully repaying all deposits, it is clear that its liquidation has undoubtedly caused many partners to lose confidence in it. Companies that have had intersections with Silvergate have issued statements distancing themselves from it.
Coinbase tweeted: "We are sorry to see Silvergate make the difficult decision to wind down its operations. Coinbase has no customers or corporate cash on Silvergate. Customer funds remain safe, accessible, and available."
Paxos, which has almost no risk exposure to Silvergate, has stopped using the SEN network.
MicroStrategy, the largest Bitcoin holder, said that if Silvergate faces bankruptcy, its Bitcoin loan with Silvergate will not be due until the first quarter of 2025 and will not be repaid early.
Cryptocurrency broker Paxos said it will abandon Silvergate and stop SEN transfers and wire transfers to its Silvergate account.
Why did Silvergate become a hot property in the cryptocurrency industry after transitioning from a traditional small bank? This has to do with the history of Silvergate.
Silvergate is a member bank of the Federal Reserve located in California, USA, founded in 1988.
Initially, Silvergate's founders Dennis Frank and Derek Eisele were in the real estate business. Between 1988 and 2013, Silvergate's main business was providing commercial loans and real estate loans and mortgages to local community residents. At its peak, this small lending bank had assets of only $1 billion.
In 2013, Bitcoin entered the bull market for the first time and surpassed the $1,000 mark. This small lending bank, which was seeking a comprehensive transformation, keenly smelled the opportunity and decided to enter the cryptocurrency market.
In 2014, Silvergate welcomed its first cryptocurrency client: SecondMarket, which later became the well-known cryptocurrency broker Genesis Trading.
In the following years, Silvergate became increasingly focused on the cryptocurrency market, not only selling its commercial banking team, but also streamlining its real estate department.
In 2017, Silvergate launched the Silvergate Exchange Network (SEN), which allows cryptocurrency investors to transfer US dollars from bank accounts to cryptocurrency exchanges 24/7. This is a proprietary and almost instantaneous payment network provided to participants in the digital currency industry, which played an important role in Silvergate's leadership position and growth strategy.
By 2019, Silvergate had become the largest cryptocurrency bank in the United States, with 1,600 of the world's top cryptocurrency miners, exchanges, and custody platforms depositing and transferring billions of dollars every month. At the end of the year, Silvergate went public on the New York Stock Exchange, and just 10 months later, its stock price soared to over $200 per share from $12 per share.
Then, Silvergate management began to explore higher-risk cryptocurrency services, including launching cryptocurrency lending services and experimenting with stablecoins.
In August 2019, Silvergate launched its cryptocurrency lending service, providing funding from its own balance sheet. In May 2021, Silvergate became the exclusive issuer of the US dollar stablecoin for the Meta-backed stablecoin project Diem. Unfortunately, after being ordered to stop by US regulators, Diem was declared a failure. However, Silvergate still had its own ideas about stablecoin issuance, so in early 2022, it spent $200 million to acquire Diem and announced plans to fully launch stablecoins in 2022.
As Silvergate drives deeper into the cryptocurrency market, it has almost become one of the only US banks that allows fiat currency to be freely transferred to cryptocurrency exchanges, with clients including Circle, Coinbase, Binance US, and Kraken, among others. In short, major cryptocurrency institutions within the US are all working with Silvergate.
According to Intelligencer, since Silvergate first allowed cryptocurrency companies to deposit US dollars into its federally insured bank, $1 trillion has changed hands on its network. Silvergate's deposits reached a peak of $14 billion at the end of 2021, with about 90% coming from its cryptocurrency clients.
So what sparked the fire that caused the explosion of the Silvergate bomb?
In fact, the entire cryptocurrency banking system has been facing a severe crisis since 2022, but the most fatal impact on Silvergate comes from the collapse of FTX.
Both FTX and Alameda had accounts with Silvergate, and the US Department of Justice subsequently froze their related assets. The collapse of FTX triggered centralized withdrawals on various cryptocurrency trading platforms, and users lost confidence in these platforms and began withdrawing their funds. The cryptocurrency trading platforms then withdrew from their partnership with Silvergate, and Silvergate could only continue to sell its own assets to cope with successive withdrawal demands.
In Q4 2022 alone, Silvergate's cryptocurrency-related deposits plummeted by 68%, and it processed over $8.1 billion in customer withdrawals, causing severe liquidity and solvency crises, and accumulating losses of over $949 million, which wiped out all its profits since 2013. In Q4 2022, it sold discounted bonds worth $5.2 billion and laid off 40% (200) of its employees to save itself.
As of December 31, 2022, Silvergate's total cash and cash equivalents held exceeded $4.6 billion, while customer deposits totaled $3.8 billion, which can generally cover users' withdrawal amounts.
However, not all of these assets are readily available, as they are subject to mismatched terms, making it difficult to immediately meet user withdrawal requests. Unlike exchanges, which require full reserves to meet user withdrawal demands at any time, banks have historically operated on a fractional reserve system, which means that large-scale withdrawal demands can cause serious run-on-the-bank crises.
Adding to the problem, US regulatory agencies have long been a "roadblock" standing in front of the cryptocurrency industry. Previously, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a joint statement regarding the liquidity risks associated with the vulnerability of the cryptocurrency market, emphasizing the liquidity risks faced by banking organizations related to certain sources of funds of entities associated with cryptocurrency assets.
Regulators pointed out that the interconnectedness of the cryptocurrency industry exacerbates the risks faced by banks with overexposure.
As of now, Silvergate has yet to disclose its 10-K report, and concerns remain about its solvency. The 10-K report is a mandatory report type required by the SEC, which is usually more in-depth than annual reports and includes detailed financial statements, balance sheets, and cash flow statements. Clearly, under the relentless pressure from US regulators, Silvergate's "amputation self-help" appears to be inadequate.
Currently, the cryptocurrency market is also experiencing turmoil, with significant price fluctuations. However, this means that users can realize short-term arbitrage opportunities. For those investing in spot contracts, buying at a lower price could be a good opportunity. For investment users pursuing high returns, trading perpetual contracts on BitVenus, leveraging, and potentially earning returns of up to 125 times, their investment could be a good option.
In conclusion, overall, Silvergate's business model is overly reliant on the cryptocurrency market, and as a bank with just over 1,000 customers, it is vulnerable to both boom and bust cycles of the industry. Once faced with a cryptocurrency market crisis, it is very easy to enter a death spiral. Will the crypto industry face a new "minefield" at that time?