Crypto-friendly US-based bank Silvergate Bank has entered into voluntary liquidation, according to an announcement made by California’s Department of Financial Protection and Innovation (DFPI).
The bank’s official demise, outlined in a document released on March 8, comes on the heels of a series of severe headwinds to its business.
These include its recent decision to delay its annual 10-K filing report amid auditing problems, which resulted in the bank losing all of its major crypto clients in a matter of days.
The bank also experienced a run on deposits in Q4 2022 amid the collapse of crypto exchange FTX, a quarter that also saw the bank report a $1 billion loss.
Silvergate Bank also recently had to shutter its flagship and highly popular Silvergate Exchange Network (SEN) service that enabled 24/7 transfers between investors and crypto exchanges.
A Blow to Crypto Adoption
Silvergate’s liquidation marks the fall of another major player in the cryptocurrency space – it also marks a major blow to the crypto adoption narrative.
That’s because Silvergate’s SEN, the bank’s flagship project, was seen as significantly lowering the barrier to investing in crypto.
Transferring fiat currency to a crypto exchange via bank transfer is widely viewed as one of the cheapest ways of purchasing crypto (card purchases tend to come with a 2-4% charge).
But transfers at most banks can take up to a few days to settle.
Silvergate’s SEN was designed to remove this issue by offering instant 24/7 transfers. The service had been described by observers as a big step forward in the integration of crypto and the traditional financial services sector.
Are SVB Financial and Signature Bank Next? Investors Are Clearly Fearful
Silvergate’s demise, which has seen its stock price slump over 70% this month, taking its losses since 2021’s record highs to over 98%, is having an effect on the share prices of other US-based crypto-friendly banks, some of whom also appear to be facing a crisis.
SVB Financial’s share price is down over 50% on Thursday after the bank announced $2.25 billion in new capital raising measures to stabilize its rocky balance sheet as it also contends with severe capital outflows.
In response to the deterioration of conditions, US Rating Agency Moody’s announced on Thursday that it had downgraded SVB Financial’s credit rating amid liquidity and funding issues.
According to analysts at The Motley Fool, SVB Financial’s “management has clearly done a poor job of managing liquidity and went too heavily into bonds too early to try and reap additional earnings accretion”.
“In a worst-case scenario, management would need to dip into its held-to-maturity bond book to cover deposit outflows,” analysts continue, warning that “losses in that portfolio exceed $15 billion, enough to wipe out almost all of SVB’s equity”.
In other words, severe losses on SVB Financial’s bond portfolio mean that if its liquidity crisis worsens, the bank could be the next domino to fall. What about New York-based Signature Bank?
Signature Bank’s share price is down a much more modest 10% on Thursday. The bank earlier issued a statement to reiterate its strong, well-diversified financial position and limited digital asset-related deposit balance.
The bank reminded investors that it does not invest in, trade hold, custody, lend against or make loans collateralized by digital assets.
But if the bank run currently hitting SVB Financial spreads to Signature, that will test its strong balance sheet.
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