The largest crypto-oriented bank Silvergate is on the verge of bankruptcy – Konstantin Kryvopust

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Silvergate Bank still can’t get out of the protracted crisis it got into after the collapse of FTX. There are serious reasons to believe that the bank will still file for bankruptcy protection. In particular, last week there was information about the “undercapitalization” of the bank, after which many customers rushed to withdraw their own deposits.

Silvergate recently admitted that it is constantly struggling, teetering on the brink of collapse as it defends its financial viability. At the same time, on March 2, the bank was forced to postpone the publication of the annual report for 2022, admitting that it was “undercapitalized”. As a result, Coinbase, Paxos and Circle stopped working with the bank, while Tether and Gemini said they had no influence over Silvergate. As a result, its shares fell by about 60% in one day.

As a reminder, Silvergate Bank has close relationships with many exchanges, market makers and stablecoin issuers as the second largest provider of crypto banking services after Signature Bank, and has taken a number of hits since the fall of FTX. In particular, these are collective lawsuits and increased pressure from regulators. Customer outflows caused by a bear market can worsen the liquidity situation.

The bank’s bonds also suffered losses in fair value of $1 billion, and only 11% of its liquid assets were held in deposits with the US Federal Reserve System, banks and other financial institutions, with most of the rest placed in securities.

The Bank for International Settlements (BIS) February 2023 Basel III Banking Monitoring Report indicates that 61.7% of total global prudential exposure to crypto-assets is most likely owned by Silvergate Bank, making its systemically important for the cryptocurrency industry.

The downside to Silvergate’s business model, which took shape long before the Justice Department’s criminal investigation into its ties to FTX, is that it takes on more significant risks and invests most of its new money in long-term bonds. The bank is too small to comply with liquidity rules, which, among other things, is of particular interest to regulatory authorities.

Finally, Silvergate may become the first bank to fail due to bad debts (deposits) rather than “bad assets”. Silvergate’s financial difficulties highlight the importance of careful regulation and monitoring of cryptocurrency banks and traders to prevent potential risks and financial instability in the crypto industry.

Is there a chance to survive?

Information has appeared in the media that indicates that the giant of the global market maker Citadel Securities plans to increase its stake in the capital of the bank Silvergate, which is on the verge of bankruptcy, and help it get out of the liquidity crisis.

In mid-February, it became known that investment firms Citadel Securities and Susquehanna Advisors Group disclosed information about the purchase of 7.5% and 5.5% shares in the equity capital of the cryptocurrency bank Silvergate, respectively, in reporting to the SEC. At the time of publication of the SEC report, the share of Citadel Securities was about $25 million.

So far, the information has not received official confirmation from the representatives of the investment firm.

However, an interesting question seems to be how the position of Silvergate was assessed at the time of the investment from Citadel Securities, was the possibility of acquiring a larger stake and the further future of the cryptobank being explored?

In theory, Citadel Securities could save Silvergate from possible bankruptcy, guided by its own interests, which would add significant optimism to the cryptocurrency market.

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