Silvergate’s connection with crypto goes back to the early days of digital currency — when the market for Bitcoin was largely limited. CEO Alan Lane was a loyal leader and wanted to build products to serve the market. “What I saw,” he said, “was the opportunity for these companies to bank, which were by themselves endangered by other banks.”
Distinguishing the disconnect between the 24/7 trading cycle of Crypton and the traditional banking 9-to-5 five-day-a-week clock, Lane has positioned the payment network to offer a middle ground between the world of dollars and the world of crypto. Its Silvergate Exchange Network (SEN) allows users to move dollars between themselves so that they can settle the cryptocurrency side of the business at any time of the day or night. The network is used by several major players in crypto and passed $1 trillion in cumulative payment volumes earlier this year. Who was FTX, whose current founder, Sam Bankman-Fried, was a fan?
“Life as a crypto firm can be divided into before Silvergate and after Silvergate,” he said. “It’s difficult to accumulate how much it would turn out to be dependent on the train companies.”
Silvergate profited from the deposits that digital asset customers left on their networks. At the end of September, deposits accounted for 90% of the bank’s overall deposit base, amounting to $11.9 billion. The bank’s securities have recovered them on the margin: Its $11.4 billion securities portfolio generated a spread of 2.2% over the three months to September.
The problem now is not only that FTX is gone, but other clients are also leaving. Silvergate revealed that FTX represented less than 10% of deposits from digital asset clients; then showed that average deposits for the quarter were down to $9.8 billion. On Friday, crypto trading platform FalconX sent an email to clients stating, “We will not be available for SEN and Silvergate wires, effective immediately and until further notice.”
In order to honor the withdrawals, Silvergate will have to sound its security depository to withdraw the funds. But rising rates have eroded the value of that portfolio — the bank was already sitting on $1 billion in empty losses at the end of September. In addition, a chunk of the portfolio ($3.1 billion) is in the hold-to-maturity sleeve, which prevents it from reaching accounting standards. The value of the silver coin, which had crossed over $4 billion at its peak in 2021, has fallen from around $200 million at the beginning of 2020 to below $1 billion.
The provider has another type of crypto exposure. Founded in 1828, it is one of the oldest banks in the US, operating for much of its history as a mutual holding company, owned by its depositors. In 2019, the bank was relegated to holding the company’s stock, leaving it heavily capitalized to issue new shares during the turnaround process. Looking for ways to invest excess capital, the bank ran into a vault. It is the first to introduce deposit and cash management services to digital-currency customers and, in late 2020, will also include lending. “The old chip is boring,” notes the company investing in the material.
It provides crypto-based lending, margin trading and crypto-mining operations. By mid-2022, the crypto-related loan book had built to $139 million, equivalent to 58% of equity capital. But the collapse in digital-asset markets has made recovering some of these loans trickier. The bank delayed filing its third-quarter earnings to review those interests, indicating that losses could be $27.5 million, stemming from defaults on a $104 million crypto-mining loan.
Several other small banks are open to crypto. New York-based Metropolitan Commercial Bank is looking at $1.5 billion in deposits from digital currency businesses by the end of 2021, equivalent to about a quarter of all deposits. One of its major clients was Voyager Digital, whose July bankruptcy filing required Metropolitan Commercial Bank to return deposits to its end users. By the end of September, deposits from digital businesses had halved.
For now, some banks are soft on asking their crypto business. Signature Bank, also based in New York, has been accepting digital-asset-related deposits since 2018, and in 2019 it launched the Silvergate payments network. It previously offered collateralized loans for certain types of cryptocurrencies but is no longer in that market. By the end of September, Signature Bank had $23.5 billion of digital assets deposited on its balance sheet, representing nearly a quarter of total deposits. Around $12.3 billion of total revenue comes from exchanges, of which FTX forms the backbone. Last week, the bank informed investors that balances were stable.
Customers Bancorp, West Reading, Pennsylvania also said that balances are now stable. It operates a blockchain-based instant payments system using its unlisted brand, CBIT. Last week, the deposit balance sat at $1.85 billion, compared with $1.9 billion at the end of September.
Banks’ compliance procedures are certain to attract greater scrutiny. Sam Bankman-Fried indicated that transfers that may be indicated for FTX may be directed to their sister company Alameda Research. The new CEO of FTX, who was charged with his bankruptcy visits, said that he had never seen “such a complete lack of corporate governance and such a complete absence of financial information that occurred here.”
All of which raises a new question for banks that have done business with FTX: Do you know your customer?
More from Bloomberg Opinion:
• Will FTX-Like Unicorns Be the Next ‘Big Short’?: Chris Bryant
• Crypto received as much as the jump in Central Banks: Andy Mukherjee
• FTX Hammers More Keys in the Crypto Coffin: Lionel Laurent
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marc Rubinstein is a former hedge fund manager. Some people don’t need an ecological system.
More stories like this are available at flowerberg.com/opinion