Silvergate caught in crypto mass withdrawal

Image Commercially Licensed From: DepositPhotos
Image Commercially Licensed From: DepositPhotos

Customers of the US bank Silvergate, which offers cryptocurrency services, have withdrawn more than $8 billion (£6.7 billion) from their crypto-linked funds.

In the third quarter of 2022, around two-thirds of the bank’s customers withdrew their deposits.

To cover the costs and maintain liquidity, the bank sold assets worth $5.2 billion.

It happened after three US authorities warned banks that producing bitcoin was “highly likely to be inconsistent with safe banking norms.”

Because Silvergate is listed on the New York Stock Exchange, it is supervised by the financial industry. It is one of only a few businesses in this area that offers cryptocurrency-related services.

The withdrawals occurred after the FTX crypto exchange, which was once worth $32 billion and filed for bankruptcy in November, shut down.

Former FTX CEO Sam Bankman-Fried has pled not guilty to cheating consumers and investors. According to authorities, up to one million debtors may have lost money.

The lawsuit has rattled the whole crypto industry, leading several companies to declare bankruptcy and cryptocurrency prices to plummet.

Silvergate’s CEO, Alan Lane, stated that the bank was selling assets to fund consumer withdrawals “because the digital asset business is evolving quickly.”

Silvergate in “crypto winter”

Silvergate is the latest victim of the industry’s chilly “crypto winter,” which began last spring.

The so-called “crypto bank” occupied an unusual niche in the market. It was a bank for bitcoin startups that needed help to obtain banking services from regular sources.

One of its customers was the now-bankrupt Alameda Research, controlled by Sam Bankman-Fried, awaiting his fraud trial in the United States.

This is awful for Silvergate, but Bankman-downfall is far worse. Moreover, fried’s has inflicted the corporation with an even larger blow: a loss of market trust.

Since Bankman-empire Fried’s collapsed, investors of all sizes have begun withdrawing funds from crypto firms. In addition, billions of dollars have been transferred from cryptocurrency storage businesses.

So far, the top companies in the market, like Binance and Coinbase, have been able to withstand extraordinary withdrawals. Silvergate is likewise clinging on for the time being, albeit at a high cost to its balance sheet.

Before it went into cryptocurrency, Silvergate was a tiny US bank. It went public in November 2019.

At the top of the market in 2021, its shares had increased by more than 1,500%, owing partly to the massive expansion of crypto at the time.

During this time, it attempted to launch its stablecoin, a sort of cryptocurrency directly linked to an asset such as the US dollar, gold, or other cryptocurrencies.

In January 2022, Silvergate paid $182 million for the technology underpinning Meta’s projected Diem (previously Libra) stablecoin, which has yet to materialize.

In a filing with the SEC, the bank stated that it sold the debt to cover the withdrawals and wrote off the Diem purchase, which means it is no longer counted as an asset.

It has also reduced its workforce by 40%, or around 200 individuals. The withdrawals have cost the bank $718 million, more than it has made since 2013.

US regulators are warning banks about the risks of cryptocurrencies.

For the first time, US regulators have warned banks about the risks of the cryptocurrency market.

The regulators warned financial institutions to be on the lookout for potential fraud, legal uncertainty, and misleading information from digital asset providers.

Banks were also warned about the “danger of spreading” from the sector.

It comes just two months after the bankruptcy of the trading platform FTX sent shockwaves across the crypto market.

The US Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a joint statement saying they were keeping an eye on what banks were doing with cryptocurrencies.

The regulators also stated that owning or issuing crypto tokens kept on decentralized networks was “very likely not in line with safe and sound banking standards.”

Banks were also instructed to take precautions to ensure that issues in the digital asset market would not extend to the rest of the financial system.

The statement on Tuesday comes after months of hesitation by US financial sector watchdogs to issue universal guidelines regarding cryptocurrency, despite banks’ requests for clearer guidance.

The fall of FTX compounded the situation

The fall of FTX in November sent shockwaves through the cryptocurrency market.

It was the world’s second-largest cryptocurrency exchange, and millions of individuals utilized it to get started in the market for digital assets.

On Tuesday, Sam Bankman-Fried, the former CEO of FTX, categorically disputed that he had defrauded consumers and investors.

He pled not guilty to claims that he used FTX customer deposits to fund his other business, Alameda Research, buy a house, and contribute to political campaigns.

Read Also: FTX: SBF denies fraud charges in court

Two of Mr. Bankman-closest Fried’s coworkers, have already pled guilty and are cooperating with the inquiry. The inquiry has shaken the whole bitcoin sector.

Mr. Bankman-Fried was one of the most influential people in the field. He was well-known for his political ties, celebrity endorsements, and bailouts of other troubled businesses.

They claim he established “a house of cards on a foundation of lies while assuring investors that it was one of the safest in crypto.”