The cryptocurrency-focused bank Silvergate Capital has revealed that clients withdrew more than $8 billion in deposits as the collapse of FTX triggered a “crisis of confidence”.
Shares in the bank had almost halved by the end of trading in New York after a bleak preliminary earnings report showed that its digital asset deposits collapsed by 68 per cent to $3.8 billion in the last quarter.
The group, based in San Diego, was forced to sell off assets in an attempt to maintain liquidity, enduring losses of $718 million on securities and related derivatives.
It is laying off 200 employees, about 40 per cent of the total, as it scrambles to cut costs and reverse last year’s rapid expansion of its workforce.
Silvergate was founded in 1986 but ventured into digital currencies in 2013, building itself into a key lender for the crypto sector. Popular exchanges including Coinbase Global and Kraken are among its customers, and it also provided services to FTX. The bank went public in 2019.
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Investors voted with their feet and by the close on Wall Street last night, shares in Silvergate were down $9.38, or 42.7 per cent, at $12.57.
The collapse of FTX, which filed for bankruptcy in November, sent shockwaves across the industry. Sam Bankman-Fried, founder of the crypto exchange, which had been one of the world’s largest, has been accused by prosecutors of orchestrating one of America’s largest financial frauds. He pleaded not guilty to eight charges, including wire fraud and money laundering conspiracy this week.
While Silvergate has stressed it had no outstanding loans or investments in FTX, its stock has tumbled by more than two thirds since the exchange’s implosion. Alan Lane, the bank’s chief executive, said: “In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure that we were maintaining cash liquidity in order to satisfy potential deposit outflows, and we currently maintain a cash position in excess of our digital asset related deposits.”
As it slows its plans for expansion, the bank has also delayed the launch of a blockchain-based payment solution it had purchased from Diem Group, the project backed by Meta Platforms, last year. As a result it expects to take an impairment charge of $196 million in the fourth quarter.
Shares in Coinbase closed $4.17, or 11.1 per cent, at $33.53 yesterday as stocks with high levels of exposure to crypto remained in focus. Few expect the pressure to abate in the near future.
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“We are in a period of ‘shoot first, ask questions later’ for any bad news related to crypto and crypto-related businesses,” Thomas Hayes, chairman of the investment firm Great Hill Capital, said. “We expect this carnage to continue for some time as there is no way to value the underlying asset.”
