Silvergate had a really bad week. Its stock is down 61% over the past week, with the bulk of that fall coming last Thursday, dropping its stock (SI) to $5.41. It’s actually down 94% over the past year, and obviously a bit lower than its all-time high of $212.
It’s not inconceivable the bank will have to enter receivership in the near future. It may still recover – the bank may have more capital than we realize, or it may receive a rescue package from an investor – but a lot of its most prominent crypto clients have already left, and the bank shut down its most attractive product, the Silvergate Exchange Network, last Friday.
Silvergate appears to have sold off billions of dollars worth of bonds at a market loss to keep up with withdrawals, which in turn meant it no longer met certain regulatory requirements that indicated it was perfectly fine.
Bloomberg’s Matt Levine explains it much more clearly in a newsletter from last week. Elizabeth Lopatto over at The Verge explains both what happened and some of the impacts to businesses.
The main result is that crypto firms are going to have to look for other banks. Some companies will find this easier than others. The established titans of this industry will, I imagine, not have too many difficulties. If you're a company with a history of operating without major issues, you'll probably be able to convince a bank that what happened to Silvergate wasn't your fault (and in a sense, it wasn't).
If you're starting an enterprise, it may be more difficult. Startups in this industry have traditionally had difficulty gaining banking services, and that won't be made easier by federal bank regulators warning financial institutions under their charge that they need to be careful, or maybe need permission, when dealing with crypto.
On Monday, White House Press Secretary Karine Jean-Pierre said the Biden administration was monitoring the situation, and that U.S. President Joe Biden would continue to call on Congress to do something. This isn't likely to reassure banks either, to the extent they may want to wait for Congress to act.
Banking services like deposits aside, companies may also have issues with accessing payment services, at least in the short term. Circle, for example, has already cut off its ACH support, at least temporarily.
A spokesperson pointed to Silvergate. “Amid growing concerns about Silvergate Bank, Circle has accelerated plans to deprecate some services and transition others to additional banking partners, completing a process that began last year to reduce risk to our customers, our business and USDC. We are communicating with customers and have taken steps to ensure access to customer funds via alternative payment and redemption channels,” the spokesperson said in a statement.
All of this will become a backdrop to the regulatory response. Bank regulators have already gone out of their way to warn about crypto. But beyond that we've already heard from officials such as Acting Comptroller of the Currency Michael Hsu, who warned months ago there may be “contagion risk.” Just this week Hsu gave another speech, where he said last year’s FTX collapse reminded him of a major bank failure, Bank of Credit and Commerce International (BCCI).
To date, despite the fall of FTX and the dozen or so bankruptcy filings last year, there hasn’t been a huge risk of contagion from crypto to the traditional financial sector. That may finally be changing.
To be clear, Silvergate didn’t fail merely because it banked crypto. But if crypto companies rushing to withdraw their funds – creating a bank run – led to Silvergate needing to sell off its bonds, which in turn led to it being under-capitalized, which has now led to the bank coming close to receivership, then this was another victim of last year’s massive failures and evidence of that contagion risk.
Regulators are likely to continue warning that crypto is fraught with danger, and have a perfectly primed example to point to.
It remains to be seen if Silvergate really does fail or if it finds a path to survival. It also remains to be seen just who will pick up its former clients – Signature Bank, the next-friendliest bank to crypto, or another of the myriad institutions out there or even a crypto-native company that has successfully run the gauntlet of the Federal Reserve Board application process.
