Silvergate warns investors it may not survive the year, shares drop 30%

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Struggling Silvergate Capital, owner of crypto-friendly bank Silvergate, has warned investors that it expects to record further losses for 2022 that have significantly impacted its “ability to continue.” Its share price tumbled 30% following the news, from $13.60 to $9.50 at press time.

Silvergate notified the Securities and Exchange Commission (SEC) on Wednesday that it won’t be able to file its annual 10-K form on time for the fiscal year 2022. It cited the last-minute sale of additional investment securities to repay outstanding loans from the Federal Home Loan Bank of San Francisco as a reason for the delay, along with the sale of additional debt securities in January and February 2023.

The bank initially posted a loss of $949 million for the final three months of 2022, which is now expected to increase.

“These additional losses will negatively impact the regulatory capital ratios of the Company and the Company’s wholly owned subsidiary, Silvergate Bank, and could result in the Company and the Bank being less than well-capitalised,” it wrote in the filing.

“In addition, the Company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements.”

Silvergate alerted the SEC that it was currently reevaluating its business strategies due to “business and regulatory challenges.” Indeed, the filing confirmed reports that the US Justice Department is investigating the firm, and also mentioned investigations by banking regulators and “congressional inquiries” as contributing to its woes.

Silvergate’s FTX ties have placed the bank in hot water

The Justice Department is investigating Silvergate over potential fraud in relation to Sam Bankman-Fried’s (SBF) crumbled crypto exchange FTX and trading firm Alameda Research. The entities enjoyed deep ties — Alameda made Silvergate its primary bank in 2022. The firm instructed FTX customers to make deposits by wiring money to Alameda’s Silvergate account.

According to Silvergate, SBF’s failed firms accounted for less than 10% of the $11.9 billion in deposits from its crypto customers. But FTX’s bankruptcy and the subsequent freeze on customer funds triggered a bank run-like event.

  • Silvergate’s customers withdrew 68% of all deposits held on behalf of the crypto industry.
  • From September to December, the bank shed 52 digital asset customers.
  • Silvergate Exchange Network loans using digital assets as collateral stood at $1.1 billion on December 31, 2022, down about $400 million from September 30, 2022. That likely indicates that some parties aggressively paid off loans to free up collateral.

Silvergate’s relationship with FTX and Alameda prompted probes by US senators Roger Marshall, Elizabeth Warren, and John Kennedy.

“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” they wrote in a letter to Silvergate in December.

Firms continue to shed ties with tainted Silvergate

This week, crypto derivatives platform LedgerX told customers it would no longer use Silvergate to receive domestic wire transfers, effective Wednesday. Instead, the firm will use Signature Bank. Signature said in December that it was moving away from the digital asset sector, but not 100%.

Two weeks ago, billionaire George Soros’s family office Soros Fund Management disclosed it had bet against Silvergate. It held options on 100,000 Silvergate shares with a market value of $1.74 million in December 31, according to a regulatory filing. If Silvergate shares drop below an undisclosed threshold, the fund will make a tidy, though relatively small, profit.

Read more: Silvergate in crisis: Billions withdrawn, liquidations and losses mount

Silvergate laid off 40% of its staff in January 2023. Shortly after, Cathie Wood’s ARK Invest disclosed it sold $5 million in Silvergate stock.

As reported by Bloomberg at the time, almost 67% of available Silvergate shares are sold short. The bank’s announcement on Wednesday that it may soon go under has brought down the share price significantly — it could be that George Soros and other traders have already seen their bets pay off.

Silvergate shares are down 96% since reaching heights in November 2021, from $236 to $9.50 at press time.

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