Silvergate Bank Faces Run On Deposits As Stock Price Tumbles

Silvergate Bank is an important fiat-to-crypto on-ramp, but it’s currently under mounting pressure as investors worry about the bank’s recent financial reports and potential regulatory scrutiny.

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Silvergate Bank Faces Run On Deposits As Stock Price Tumbles

The story in crypto circles over the last few days has been the massive plunge in shares of Federal Reserve Member Bank Silvergate Capital. One of the most crypto-friendly banks in the world, Silvergate saw its business success rise throughout the boom cycle of 2020 and 2021, with deposits soaring as a result of its in-house Silvergate Exchange Network (SEN), which is a payment platform developed by Silvergate that enables companies to transfer money to each other across the bank’s own rails. SEN is only available for transactions in U.S. dollars and euros — virtual currency transactions do not take place on the platform. The growing utilization of SEN was a huge boon for the Silvergate business as it gave the bank an almost-free method of funding its activities because the platform does not pay out interest on deposits on SEN. The platform grew in such an explosive manner due to the difficulty that traditional crypto firms had with finding reputable banking partners in the United States. 

“The Silvergate Exchange Network (SEN) enables our digital currency and institutional investor clients to send U.S. dollars and euros 24 hours a day, 7 days a week, 365 days a year between their Silvergate accounts and the accounts of other Silvergate clients. This can be done via our proprietary API or our online banking portal, enabling near real-time transfers and immediate availability of funds.” — Silvergate website 

Following the collapse of FTX, we began to monitor Silvergate closely and investors began to ask questions about the role that Silvergate may have played in enabling the illicit financial scheme for which Sam Bankman-Fried and his associates are charged. 

Dylan LeClair 🟠 @DylanLeClair_

Silvergate -46% over the last month. $SI

In a now-deleted page on their website, Silvergate displayed the following quote from Sam Bankman-Fried: 

As details emerged regarding the Silvergate operation, specifically in regards to the relationship with FTX — the fact that deposits to FTX were routed to the Alameda Research bank account at Silvergate — some investors began worrying about impending regulatory clampdown due to seemingly lax compliance and the possibility of anti-money laundering violations. As a result of this concern, the share price of Silvergate started to aggressively slide. Since the collapse of FTX, shares have fallen by nearly 80%.

Dylan LeClair 🟠 @DylanLeClair_

@AlderLaneEggs who was early in calling out the FTX red flags and subsequent fraud, is raising questions about Silvergate. It’s quite worrisome that an institutional player like @falconxnetwork is halting it's use of SEN Network, effective immediately.

The worry for Silvergate following the collapse of FTX was unlike many of the crypto-native firms that went bust over the course of 2022. Some of the issues we saw that led to other blowups were sour crypto-native loan books and large directional exposure to faltering crypto assets. As a traditional fractional reserve bank, the largest worry for SIlvergate was having a run on its deposits, which is exactly what happened when Silvergate announced its quarterly report, leading to shares plunging by more than 40% in a single trading day. 

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The rest of this article is open to paying members only. Here’s what’s behind the paywall 🔏:

• Scrutiny and warnings from the Federal Reserve about risks cryptocurrencies pose to banking institutions.

• What makes SEN useful and why its loan books are important to industry players.

• How the negative news cycle is a potentially bullish signal for bitcoin.