Silvergate Capital Corp. on Friday discontinued the Silvergate Exchange Network for cryptocurrency payments, dubbing it “a risk-based decision” effective immediately.
The move comes at a time of financial uncertainty for the bank, which last week delayed its 10-K filing and acknowledged it may be “less than well-capitalized.”
Silvergate was the first traditional bank to develop this sort of payments network, according to The Motley Fool. Its clients included “all of the major crypto exchanges and more than 1,000 institutional investors.”
All other deposit-related services remain operational, the bank wrote on its website.
Following the filing Wednesday, several Silvergate partners, including Coinbase, Circle, Paxos, Galaxy Digital, LedgerX and Bitstamp, halted their business with the bank.
Coinbase said its decision was made “in light of recent developments & out of an abundance of caution.” Circle said the process of winding down its Silvergate relationship had begun last year, “as signs of trouble and broader crypto asset risk exposure became increasingly apparent.”
An executive at stablecoin company Tether took to Twitter to deny meaningful exposure to the bank.
“This is a very bad sign. By waiting after the close of business to announce this, now none of the money can leave,” J. Austin Campbell, an adjunct professor of Columbia Business School, told Bloomberg following the closure of Silvergate Exchange Network. “The good news is a lot of crypto people have already cut relationships with Silvergate and moved away from them — it’s less catastrophic than it could be.”
Silvergate’s challenges began with the collapse of crypto exchange FTX and its sister companies, which followed alleged misdoings by FTX executives including Sam Bankman-Fried, whose 12-count criminal trial is set to begin in October.
Following a bank run kicked off by FTX’s collapse, the bank turned to the Federal Home Loan Bank of San Francisco for a cash injection of $4.3 billion. In January, that made up nearly all of the bank’s $4.6 billion cash on hand, according to American Banker.
In taking the cash injection, Silvergate introduced crypto market risk further into the traditional banking system, according to three U.S. senators in a letter to Silvergate CEO Alan Lane.
The bank failed “miserably” in detecting misuse of funds by FTX and sister company Alameda Research, the senators said. The Justice Department followed by opening a probe into how much the bank knew about FTX executives’ alleged misdeeds. In its filing, Silvergate named the probe and heightened regulatory scrutiny as factors that could affect its financial results.
Also Friday, the judge presiding over crypto lender BlockFi’s bankruptcy case told Silvergate that it must return about $9.8 million deposited by BlockFi immediately. BlockFi filed for bankruptcy in November following exposure to FTX.
Silvergate’s share price stood at $5.93 Monday morning, up from $5.35 at close-of-business Friday. That’s a 65.8% drop from the start of 2023, and a 94% decrease from 12 months ago.
Silvergate did not return a request for comment by press time.