Crypto-focused bank Silvergate plans to liquidate after a blow from FTX

March 8 (Reuters) – Crypto-focused bank Silvergate Capital Corp ( SI.N ) said on Wednesday it plans to wind down operations and voluntarily liquidate after it was hit by losses following the dramatic collapse of crypto exchange FTX, sending shares down 35 % in aftermarket.

The decision to close the bank comes after the company warned last week that it was evaluating its ability to operate as a going concern, revealing that it had sold additional debt securities this year at a loss and that further losses mean the bank may be “less than well capitalized.”[ads1];

The dire outcome for La Jolla, California-based Silvergate, one of the crypto industry’s favored banks, shows the extent of the impact on the digital asset industry from the demise of FTX, which filed for bankruptcy in November after failing to cover customer withdrawals.

In a statement, Silvergate said the decision to wind up its bank was “the best way forward” in light of “recent industry and regulatory developments”. Its liquidation and winding-up plan includes full repayment of deposits, the bank added.

Several partners in the bank, including high-profile firms such as Coinbase Global Inc ( COIN.O ) and Galaxy Digital, severed ties with Silvergate last week.

Following Silvergate’s statement, crypto exchange Coinbase said it has no client or corporate cash at Silvergate, while Binance CEO Changpeng Zhao said the company had no asset losses at Silvergate.

Silvergate reported a loss of $1 billion for the fourth quarter as investors rushed to withdraw more than $8 billion in deposits.

Silvergate has retained Centerview Partners LLC as financial advisor and Cravath, Swaine & Moore LLP as legal counsel, the bank said in a statement.

Founded in 1988, Silvergate ventured into crypto in 2013. The bank had also operated a mortgage warehousing business, but announced in December that it would spin off that division, citing the rising interest rate environment and the reduction in mortgage volumes.

Last week, Silvergate discontinued the Silvergate Exchange Network, its crypto payment network and one of its most popular offerings. This network enabled round-the-clock transfers between investors and crypto exchanges, unlike traditional wire transfers, which can often take days to settle.

While the risk of contagion is minimal, given that Silvergate has said it will repay depositors and has loans, the loss of the Silvergate Exchange Network is disappointing, said Ram Ahluwalia, chief executive of Lumida Wealth, an investment adviser specializing in digital assets.

“It’s more of a strategic loss of critical infrastructure for crypto,” he said.

The Federal Deposit Insurance Corp (FDIC) declined comment on Wednesday when asked about the bank’s failure beyond saying it does not regulate the bank or the holding company. Bloomberg previously reported that the FDIC had discussed with Silvergate ways to avoid a shutdown.

Federal prosecutors in Washington are investigating the company and its connections with FTX and the trading firm Alameda Research. In January, three US senators asked Silvergate for details about its risk management and FTX.

In a statement, the California Department of Financial Protection and Innovation, which oversees Silvergate under a state charter, said it is evaluating the bank’s compliance with financial laws, as well as safety and soundness obligations, and is working with its relevant federal counterparts.

More than a trillion dollars in value was wiped from the crypto sector in 2022 with rising interest rates exacerbating fears of an economic downturn.

After rapid growth in 2020 and 2021, bitcoin – by far the most popular digital currency – fell more than 60% last year, putting pressure on the digital asset industry.

Reporting by Hannah Lang in Washington and Anirban Chakroborti in Bengaluru; Additional reporting by Manya Saini and Mrinmay Dey in Bengaluru Editing by Maju Samuel, Matthew Lewis and Lincoln Feast.

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