Over $8 billion in cryptocurrency-linked deposits has been withdrawn by customers of US bank Silvergate, which offers cryptocurrency services.
During the final three months of 2022, around two-thirds of the bank’s clients withdrew their savings.
To fund the expense and maintain its liquidity, the bank liquidated $5.2 billion in assets.
A warning from three US agencies that owning or creating cryptocurrency was “very likely to be inconsistent with safe and sound banking procedures” was issued at the same time. Since Silvergate is a bank listed on the New York Stock Exchange, which is subject to financial industry regulation, it is one of just a few companies in this industry that offer cryptocurrency services.
The withdrawals came when the FTX cryptocurrency exchange, which had been valued at $32 billion before declaring bankruptcy in November, collapsed.
Sam Bankman-Fried, the former CEO of FTX, has entered a not-guilty plea to accusations that he deceived investors and consumers. One million creditors may have lost their money, according to the prosecution.
The lawsuit has shaken the whole cryptocurrency sector, causing other businesses to file for bankruptcy and a drop in the value of cryptocurrencies.
Silvergate’s CEO, Alan Lane, stated that due to the “rapid developments in the digital asset business,” the bank was selling assets to satisfy consumer withdrawals.
The sector has been experiencing a chilly “crypto winter” since last spring, and Silvergate is its latest casualty.
As a bank for crypto businesses that had trouble obtaining banking services from conventional sources, the so-called crypto bank held a somewhat unusual position in the market.
One of its clients was the now-bankrupt Alameda Research, whose owner Sam Bankman-Fried is facing fraud charges in the US and is awaiting trial.
That is a setback for Silvergate in and of itself, but Bankman-Fried’s collapse has dealt the business a greater blow: market confidence.
Since Bankman-Fried’s empire crumbled, investors of all sizes have started transferring billions of dollars from firms that hold cryptocurrency funds out of crypto businesses.
It looks like Silvergate is surviving the storm for the time being, but at a significant cost to its balance sheet, much like the top players in the market, including Binance and Coinbase, have so far weathered the extraordinary withdrawals.
Prior to entering the world of cryptocurrencies, Silvergate was a modest US bank.
The market’s shares increased by almost 1,500% by the time it reached its peak in 2021, largely due to the explosive expansion of cryptocurrencies throughout this time.
It attempted to introduce its own stablecoin at this period, a type of cryptocurrency that is closely linked to an asset like gold, the US dollar, or other cryptocurrencies.
And in January 2022, Silvergate spent $182 million to purchase the technology for Meta’s doomed Diem (previously Libra) stablecoin.
The bank said in a filing with the US Securities and Exchange Commission that it had wiped off the Diem acquisition, which means it is no longer considered an asset and sold the debt to pay for the withdrawals.
Additionally, it has cut its workforce by 40%, or about 200 employees, and overall the withdrawals have cost the bank $718 million, more than its profit since 2013.