Silvergate Suspends Crypto Payments Network And More
TL; DR
Silvergate Bank has closed down Silvergate Exchange Network as a result of financial and regulatory challenges.
The implosion of FTX and its sister company Alameda Research contributed to Silvergate’s financial woes.
Galaxy Digital, LedgerX, Coinbase, Circle, Paxos and Bitstamp have ended their business partnerships with Silvergate Bank.
By end of February Silvergate Capital Corp share price has fallen by 89% from its all-time-high of November 2021.
Introduction
The crypto meltdown that started in early 2022 continues to wreak havoc in the sector as some cryptocurrency-related projects wind down their operations. Recently, Silvergate Capital Corp announced that it is discontinuing Silvergate Exchange Network. Today, we discuss the possible causes of the wind down
The closure of Silvergate Exchange Network (SEN)
On 8 March 2023 Silvergate Capital Corp, the holding company for Silvergate Exchange Network, announced that it had discontinued SEN, its cryptocurrency payment network. Although the company did not divulge the exact reason for its action, it stated that it is a risk-based decision, meaning the organization could be facing viability or liquidity challenges.
Silvergate Bank- Coindesk:format(webp)/cloudfront-us-east-1.images.arcpublishing.com/coindesk/GNWQ2ZAWD5C4HKPIBBC6KH5FCU.png “Coindesk”)
The shutdown of Silvergate Exchange Network (SEN) comes a few days after the rating agency Moody’s downgraded it from Ba3 to Caa1 as a result of its failure to submit its annual report to the U.S. Securities and Exchange Commission (SEC). However, Silvergate Bank has said that all other “deposit related services remain operational.”
Read also: Understanding how the Merge puts Ethereum in Sec’s crosshair
The announcement to discontinue Silvergate Exchange Network comes a week after Silvergate Capital Corp informed the SEC that it was uating its ability to continue operating as a going concern and that it had sold additional debt instruments at a loss. It emphasized that additional sale of its securities at a loss would result in the bank becoming “less than capitalized.”
The bank’s Q3, 2022 financial performance shows that it may be facing financial difficulties. This is because during that period it accrued a loss of $886 million from selling its underwater securities. Silvergate Bank opted to sell the securities as a result of a 68% fall in its crypto-related deposits during the same period.
Notably, the Bank intended to raise the funds required to pay off $9.9 million to BlockFi, a crypto lending institution, as per the order of A U.S. bankruptcy judge.
Silvergate Bank’s discontinuation of Silvergate Exchange Network (SEN) can be a sign that it is no longer interested in any crypto-related business. Already, some of its key partners in the crypto sector like Coinbase and stablecoin issuers, Paxos and Circle, have ended their existing business relationships with it.
Understanding the Silvergate Exchange Network (SEN)
Silvergate Exchange Network (SEN) was a crypto-related organization which facilitated the conversion of cryptocurrencies to fiat currencies and vice versa among crypto exchanges, institutional investors and other clients. By the third quarter of 2022, SEN had more than 1,600 customers that included crypto exchanges and institutional investors with a total deposit of more than $12 billion.
The possible causes of Silvergate Bank’s discontinuation of Silvergate Exchange Network (SEN)
There are several factors that are likely to have contributed to the discontinuation of Silvergate Exchange Network (SEN). These may include government pressure, the crypto collapse of FTX, severed relationships with its partners and the significant fall in the value of its shares.
The Collapse of FTX
Silvergate Bank’s current problems started when the FTX crypto exchange and its sister company Alameda Research collapsed in the third quarter of 2022. After this crypto mishap, FTX customers withdrew $8.1 billion of deposits. In order to meet this high withdrawal, Silvergate Bank took a loan from the Home Bank Loan , a Federal organization that provides banks with low cost funding.
Read also: Britain Sets to Regulate the Crypto after FTX Collapse
Collapse of FTX- Paybito
That loan caused a stir among Federal lawmakers who were afraid that if Silvergate Bank would fail to repay the borrowed amount the Federal Deposit Insurance Corp might be severely affected which could lead to a public uproar. As a result, Silvergate was requested to repay the loan immediately.
In order to repay that loan Silvergate Bank sold its securities at a total loss amounting to $886 million.
Government pressure
The Silvergate Bank was also under intense scrutiny from the U.S. prosecutors in the Justice Department’s fraud pertaining to its financial dealings with FTX and Alameda Research.
For some time now, the regulators had been questioning Silvergate Bank over its failure to detect the suspicious financial transactions between FTX and its sister company Alameda Research. At the time of its collapse Silvergate held $1 billion in deposits from FTX.
In light of these accusations and other developments in the crypto sector, Silvergate has found it necessary to wind down and have a voluntary liquidation of Silvergate Exchange Network (SEN).
Read also: Key lessons from the Collapse of FTX and the Implosion of FTT
Constant decrease in the value of its stock
The value of Silvergate’s share has been under threat since the collapse of FTX and Alameda Research. Currently, the price of its shares has decreased by around 65.8% since the start of the year. Worse still, its share price has decreased by 89% from its all time high in November 2021. This constant decrease in the value of its shares and the current unstable crypto market has influenced Silvergate Bank to discontinue Silvergate Exchange Network (SEN).
Relationship with its partners
Most of its partners have ended their business relationships with Silvergate following its announcement that it was going to delay filing its annual report. For example, Galaxy Digital, LedgerX, Coinbase, Circle, Paxos and Bitstamp publicly declared that they have ended their partnerships with Silvergate Bank.
The brief History of Silvergate Bank
Silvergate Bank started off as a loan and savings association in 1988 in California, United States. In 1996 Dennis Frank and Derek J. Eisele recapitalized Silvergate and turned it into a commercial bank that provides lending and banking services such as commercial real estate and business banking accounts. It is one bank that has been willing to partner cryptocurrency firms and support their crypto services.
Conclusion
On 8 March 2023 Silvergate Bank announced that it was discontinuing its Silvergate Exchange Network (SEN). Although it did not specify the exact reasons, several factors have contributed to that decision. These include the implosion FTX and Alameda, the drop in its share prices and government regulatory pressure.
FAQs about Silvergate Bank
Is Silvergate a Bank?
Silver Gate Bank is a commercial bank that was formed in 1996 and is currently operating in the United States. Initially, it was formed as a loan and savings association in 1988 in California. It offers various commercial services such as lending and real-estate.
How big is Silvergate Bank?
Silvergate Bank is a big financial institution which has many institutional clients since it offers various services like business savings, money market, certificates of deposit, cash management, online banking and processing services. It was formed in the United States in 1996.
Is Silvergate Bank Good?
Silvergate is a reputable bank that services various clients including institutional investors. It became very popular when it created its Silvergate Exchange Network which helped its clients to exchange cryptocurrency with fiat money. It has always been able to meet its financial obligations to its customers.
Who owns Silvergate Capital?
Martin S. Friedman is the largest individual shareholder of Silvergate Capital. However, there are a few other individual shareholders as well as many institutional equity holders.
