Crypto-friendly bank Silvergate Capital faces a financial crisis

Crypto-friendly bank Silvergate Capital has delayed its annual report and warned in an SEC filing that recent events could affect "its ability to continue as a going concern."

Why it matters: The collapse of a prominent bank in the crypto ecosystem would give regulators ammunition to scrutinize other financial institutions serving the industry.

Driving the news: Silvergate said yesterday that it would be unable to file its Form 10-K report with the SEC by March 16.

Context: Silvergate previously reported a fourth-quarter net loss of $1 billion, after the collapse of crypto exchange FTX prompted investors to pull $8 billion in the final three months of 2022.

• Subsequently, the bank said it sold additional investment securities “beyond what was previously anticipated” to repay outstanding advances from the Federal Home Loan Bank (FHLB) of San Francisco.
• Last year Silvergate received $4.3 billion in home loan advances from the FHLB program, a public/private system developed in the post-Depression era to backstop liquidity-strapped banks.

Between the lines: In addition to its financial troubles, Silvergate also disclosed that it is facing certain regulatory inquiries and investigations.

• Reuters reported that prosecutors in the Justice Department's fraud unit were evaluating its dealings with FTX and sister firm Alameda Research.
• Separately, a bipartisan group of U.S. senators has asked for more details related to its risk management practices and ties to the bankrupt crypto exchange.

What they’re saying: “These additional losses will negatively impact the regulatory capital ratios of the Company … and could result in [it] being less than well-capitalized,” Silvergate wrote in the filing.

• Silvergate said it “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.”

The fallout: Silvergate customers and partners were quick to move on from the troubled bank.

• LedgerX, the crypto derivatives subsidiary of FTX (and one of the only units excluded from its bankruptcy process), told customers yesterday that it would no longer accept wire transfers from Silvergate.
• Meanwhile, U.S.-based crypto exchange Coinbase said it would no longer accept or initiate payments to or from Silvergate, switching to Signature Bank for its Prime customers.
• A Paxos spokesperson told Axios that it has discontinued all transfers and wires to its Silvergate account.

The big picture: Federal regulators were already putting pressure on crypto-friendly banks, with the Federal Reserve, OCC and FDIC issuing a joint statement in January highlighting "key risks associated with crypto-assets."

• The troubles at Silvergate are likely to increase scrutiny of banks that work with crypto companies.