The rise and fall of Silvergate’s crypto business

Silvergate Bank lost more than $8 billion in deposits from its crypto customers in the final months of 2022 as its core business crumbled amid the industry’s implosion — just as the bank’s regulators had predicted could happen to such institutions.

The sudden evaporation of most of its deposit base was just one of several concerns for the La Jolla, Calif.-based lender. The company has faced pressure from US banking watchdogs who have insisted that banks should not concentrate on crypto, and the revelations this week revealed investigations by regulators and the US Department of Justice, plus a suggestion that ongoing audits could require a reformulation of its operations. economy.

All that aside, its one-time crypto strengths began to drag it down, according to a CoinDesk analysis of the bank’s financial reports over the past few years.

Many of the raw numbers reported by Silvergate over the years reveal an institution that may have peaked in 2021, long before the dramas of 2022 rocked the crypto sector. Volume on the Silvergate Exchange Network, for example, peaked in the first half of 2021, with $406 billion in transfers, falling to $230 billion in the second half of 2022.

And the bank’s total asset size also peaked in the fourth quarter of 2021, at $16 billion. The latest report put it at $11.4 billion.

Even the highlight of the assets describes a very small bank – the scale of a mid-tier community bank – despite its outsized reputation as a core part of the digital asset industry’s US banking presence. A near-equivalent for its size in California would be the slightly larger Farmers and Merchants Bank of Long Beach, according to state bank data.

But a key difference between Silvergate and the more traditional Long Beach community bank is their key measure of capital. The crypto bank slipped quickly in the last quarter of 2022 to a so-called leverage ratio which revealed that it retained only 5.4% of capital against its total assets. In the same quarter in the latter bank, it reported a share of 10.9%.

Under US bank capital rules, 5% is the edge of the cliff, beyond which a bank descends below a “well-capitalized” designation and toward the territory of emergency intervention by regulators.

A spokesman representing the bank said: “Silvergate cannot comment beyond what has already been made publicly available.”

One of the most dramatic descents to trace in Silvergate’s publicly released data was the deposit problem.

Silvergate identified the number of digital asset clients it worked with each quarter, and that number rose steadily to 1,620 last quarter — most of those identified as institutional investors, although more than 100 were “digital asset exchanges.” However, these crypto customers’ deposits fell from nearly $12 billion in the third quarter of last year to less than $4 billion by the end of the year.

The amount has clearly fallen much more than that now, as several big names in the customer base are breaking ties. Coinbase, Paxos, Circle Internet Financial and Galaxy Digital have been among those to make very public comments distancing themselves from the struggling bank.

A traditional, regulated depository cannot survive without a deposit base, and Silvergate’s coffers were quickly drawn down as major crypto customers dealt with their own collapses, bankruptcies and legal disputes that required an immediate vacuuming of their liquid cash last year.

Still, for crypto companies, the options for US banks are increasingly narrow as the Federal Reserve and other banking agencies warn they don’t want lenders they oversee to become too exposed to the digital asset sector. Only a few banks had been as openly and unapologetically crypto-focused as Silvergate, so their struggles do not offer a shining path for other institutions to follow.