Silvergate Capital Corporation announced in a dossier submitted to the US Securities and Exchange Commission that they may be less than well-capitalized and are reassessing their business.
Silvergate stated that “the company is currently in the process of reevaluating its business and strategies based on the challenges of the market conditions and regulations that the company is currently facing”. The bank also informed the SEC that they could not submit an annual financial statement on time because they needed more time to analyze, audit, and document transactions related to the next events.
Following the above statement, a series of cryptocurrency companies declared the termination of their business relationship with the bank. These companies include:
- Coinbase, which will no longer use Silvergate to pay for its institutional customers and will now use Signature Bank (SBNY) to pay. Coinbase said they will have minimal contact with the bank, limiting their interactions with the bank to cryptocurrency transactions.
- Paxos, the issuer of the stablecoin also left Silvergate and said, “We are very sensitive to concerns around Silvergate”.
- Galaxy Digital, CBOE Digital trading platform, Bitstamp exchange have also temporarily stopped services for all their users.
The bank’s stock price decreased by more than 50% on thursday and decreased by about 95% in the past year.
The difficulties of cryptocurrency companies are certainly shared with their favorite banks. Still, bank management agencies have targeted these lenders with warnings about excessive exposure to cryptocurrencies, warning that exposure to volatile markets could undermine the stability of banks. Silvergate is an example of this, as illustrated by its “sudden parachuting” from its top cryptocurrency consumers.
US banking management agencies, including the Federal Reserve (Fed) and the Federal Deposit Insurance Group (FDIC), have mobilized to erect a barrier between the banking system they monitor and the cryptocurrency industry that they consider a leading danger to the traditional financial sector.
The agencies’ policy claims are carefully targeting banks to focus on digital assets, companies issuing and trading them. In their latest statement last week, the Fed and other US bank agencies warned banks that cryptocurrencies posed significant dangers in liquidity. The lenders, in general, is being forced to stay away from digital assets.
Last year, Silvergate’s leverage ratio dropped nearly 6% from a healthy 11% to just over 5%. The limit for a bank to be considered to have adequate capital is 5%. If a bank gets close to 4%, it will usually receive a call from the FDIC. The FDIC is the agency responsible for handling the bank’s failure and ensures that customers are damaged as little as possible. And on thursday, Silvergate announced that they may be “less than well-capitalized”.
Thanks to FDIC insurance, depositors’ money in the United States is safe, as long as it is no more than $ 250,000. Even in cases where bank ownership changes hands, the federal government still guarantees each penny. However, The FDIC does not insure digital assets. Any cryptocurrency held on behalf of a bank’s customers is not protected by any measures. If Silvergate fails, this will mark the first time the FDIC has to provide cryptocurrency insurance.
