Crypto companies have a new crisis: Banks can’t take their money

Silvergate rattled the market with a disclosure to the Securities and Exchange Commission that it would miss a deadline to file its annual 10-K report. In addition to warning about its ability to continue operations, the company said it is “reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces.”

A Silvergate spokesperson said the firm is “working diligently to file the 10-K as soon as possible.”

La Jolla, California-based Silvergate was founded in the late 1980s, but it didn’t see rapid growth until 2013, when executives began curating business from the cryptocurrency industry. Digital asset firms had had a hard time getting banking services. Silvergate swooped in and quickly increased deposits from crypto companies as the prices of Bitcoin and other tokens rose. Silvergate said it had $14.3 billion in deposits at the end of 2021.

The firm also created the “Silvergate Exchange Network” (SEN) to handle traditional currency transfers between its clients. In the fourth quarter of 2021, the network handled $219.2 billion in US dollar transfers. At the end of that year, customers included 94 crypto exchanges and 894 institutional investors. The firm also provided loans in US dollars to customers who pledged Bitcoin as collateral.

The SEN network allowed crypto companies to avoid ACH transfers, which can take several business days to complete. Silvergate said the network operated 24 hours a day, year-round, with “near real-time transfers and immediate availability of funds.”

As concerns about Silvergate’s health spread on Thursday, major firms announced they would withdraw from the special education program. Circle internet Financial, which issues the dollar-backed USDC stablecoin
,

on Twitter so there was “discontinuation of certain services” with Silvergate.

Coinbase Global

(COIN) so it would no longer accept or initiate payments to or from Silvergate. Stablecoin company Paxos so it had suspended SEN transfers to its Silvergate account but will continue to process outgoing transactions.

Silvergate has also experienced a run on deposits, which fell by $8.1 billion in the fourth quarter to $3.8 billion, wiping out seven years of profits at the company.

The concern now is a possible extinction of SEN, which could have broad ramifications for the liquidity of the token market, said Ava Labs president John Wu, whose firm helped build the Avalanche blockchain.

Wu said that his company, as well as almost all other crypto firms and institutional investors, have accounts with Silvergate and that SEN made it much easier and faster to transfer money between investors, exchanges and market makers.

“We’re losing the few skins we have” to transfer traditional money, Wu says. “If Silvergate goes out of business, it’s going to push funds and market makers further offshore.”

Wu said that “slippage” on crypto trades, or the difference between the price at which a trade is expected to happen and where it actually executes, had already worsened in recent months as market makers such as Genesis Global withdrew from the market. The disappearance of Silvergate’s network would make liquidity worse, he said.

Some financial institutions that have courted crypto customers, such as Signature Bank

(SBNY), which operates a network similar to SEN, has announced that it is diversifying away from the industry. That makes it unlikely that another bank can fill Silvergate’s shoes in the short term.

Regulators, for their part, may also see the Silvergate crisis as another reason to keep crypto out of the banking system. Federal regulators have issued guidance recently, warning banks about the risks associated with crypto activities, although they say banks are not prohibited from conducting crypto business. Top regulators, including the Federal Reserve, issued a joint statement in January saying they were “carefully reviewing any proposals by banking organizations to engage in activities involving cryptoassets.”

The potential failure of Silvergate would intensify scrutiny, said Todd Phillips, who runs Phillips Policy Consulting and was a senior counsel for the Federal Deposit Insurance Corp.

“If Silvergate Bank failed, regulators would spend a lot more time investigating how risky these types of crypto activities really are,” says Phillips. “If it’s more expensive for banks to cater to one industry than another, that’s just economics. The banks have to make a decision whether they want to bank this type of industry.”

Write to Joe Light at [email protected]