Silvergate forced to cover $8bn worth of crypto-related withdrawals | Cryptocurrencies

Customers of the US bank Silvergate, one of the few mainstream financial organisations that focuses on providing services to the cryptocurrency sector, have pulled more than $8bn (£6.7bn) of their crypto-related deposits from the lender.

More than two-thirds of customers’ deposits were withdrawn in the final three months of 2022, as the collapse of the FTX exchange reverberated around the cryptocurrency world.

While most of the impact from the collapse has so far been felt only by other organisations and individuals in cryptocurrency, limiting the “contagion” to the wider economy, Silvergate, an otherwise conventional bank, has been forced to take extraordinary action to protect its balance sheet.

The bank said on Thursday it was forced to sell $5.2bn worth of assets for cash “in order to accommodate sustained lower deposit levels and to maintain a highly liquid balance sheet”, and booked a loss of $718m on those sales.

“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,” said Alan Lane, the chief executive of Silvergate.

The bank attributed the withdrawals to a “crisis of confidence across the ecosystem” that had led many to seek to reduce their risk to digital assets.

Based in California, the bank’s NYSE-listed shares fell by more than 40% on the news, on top of a longer-term decline of almost 90% over the last year. Once a small community bank, it reinvented itself during the crypto boom as one of the favoured providers of services to companies that struggled to work with conventional financial providers.

“We are in a period of ‘shoot first, ask questions later’ for any bad news related to crypto and crypto-related businesses,” said Thomas Hayes, the chair and managing member at the investment firm Great Hill Capital.

“We expect this carnage to continue for some time as there is no way to value the underlying asset.”

One of Silvergate’s largest customers was Alameda Research, the hedge fund set up by Sam Bankman-Fried, and the ultimate cause of the downfall of FTX. Alameda’s Silvergate bank account was used by FTX to receive inbound wire transfers for the exchange. These ultimately stayed in Alameda’s accounts rather than being passed on to FTX.

That missing money resulted in an $8bn hole in FTX’s books, leaving it unable to fulfil customer withdrawals during a run on the exchange in November.

In the US on Tuesday three federal financial agencies – the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency – put out a statement warning banks that issuing or holding cryptocurrency was “highly likely to be inconsistent with safe and sound banking practices”.