Silvergate’s deepening crisis jolts crypto stocks
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A slew of crypto heavyweights including Coinbase Global have dropped Silvergate as their banking partner.
PHOTO: REUTERS
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BENGALURU – Shares of Silvergate Capital fell as much as 11 per cent on Monday after the bank suspended its cryptocurrency payment network and expressed doubts over the viability of its business.
The stock closed the volatile session 6.4 per cent lower at US$5.40, after wild swings between gains and losses throughout the day.
Several crypto stocks also closed in negative territory. Crypto lending peer Signature Bank was down 2.5 per cent. Bitcoin-mining machine makers Ebang International and Canaan dropped 2.8 per cent and 8.4 per cent respectively. Bitcoin buyer MicroStrategy declined 3.8 per cent and exchange Coinbase Global slipped 2.7 per cent.
Crypto-focused bank Silvergate said late on Friday that it had made a “risk-based decision” to discontinue the Silvergate Exchange Network (SEN) effective immediately.
“The SEN is Silvergate’s main flagship product that previously was the key attraction for depositors to bring funds to the bank,” said analysts at Wedbush. The discontinuation could signal that Silvergate may consider winding down its operations, they added.
Shares of Silvergate hit a record low of US$4.86 on Friday, shedding nearly 98 per cent of their value since closing at an all-time high in November 2021 and wiping out more than US$7 billion (S$9.4 billion) from the company’s market capitalisation.
The firm has been struggling to stay afloat after the collapse of Sam Bankman-Fried’s crypto exchange FTX
“The crypto market reacted to the negative news from Silvergate Bank, with both Bitcoin and Ethereum down about 4.8 per cent for the week,” analysts at brokerage Bernstein said.
A slew of crypto heavyweights including Coinbase Global have dropped Silvergate as their banking partner.
Silvergate’s SEN was a key piece of financial plumbing for moving money in the crypto industry, letting customers of companies including Coinbase, Gemini and Crypto.com use US dollars to buy and sell Bitcoin, Ether and other digital assets. It was billed as a 24/7 operation that provided liquidity and its suspension could make it harder to buy and sell assets quickly in a fast-moving industry that is lacking stable and credible financial partners.
“This is the preview of shrinkage in the crypto business,” said Mr Thomas Vartanian, executive director of the Financial Technology and Cybersecurity Centre. “How much it shrinks will be determined by how many traditional banks want to do business with them and how much aggravation regulators give traditional financial institutions for dealing with crypto.”
“It creates a significant blow,” said Mr Zachary Friedman, chief strategy officer of Secure Digital Markets. “If you don’t have strong liquidity and stable on- and off-ramps, then it is difficult for capital to flow and it adds friction into a system that is unfortunately going to affect consumers.”
Silvergate’s problems are adding fuel to the debate among United States regulators over whether banks can manage the risks that come with digital assets, and could put more distance between the crypto industry and mainstream financial institutions.
Signature Bank, another common industry banking partner based in New York, has pulled back in the wake of the collapse of FTX, parting ways with crypto exchange Binance. The bank also stopped processing deposits or withdrawals of non-corporate clients of Kraken, another crypto exchange.
A day after Silvergate suspended its payment network, crypto exchange Bybit announced that it could no longer accept US dollar deposits from users through bank transfers due to “service outages from our partner”, without disclosing the name of the partner. Bybit was the second-largest derivatives exchange, with US$301 billion in trading volume in January, trailing only Binance, according to data from CryptoCompare.
The retreat of US banks – particularly regulated ones – from doing business with crypto means that firms may eventually look for banking partners that operate on the fringes of the industry, or are even based abroad. For customers, that would inherently mean fewer regulatory protections.
“People are going to have to look to second- and third-tier banking rails or foreign banks that operate more in the crypto shadow banking realm that are outside the purview of regulation,” Mr Friedman said. “It just causes more potential black swan risk.” REUTERS, BLOOMBERG
