Crypto-friendly bank Silvergate (SI.N) is being hit by a string of critiques.
On March 2, Silvergate just announced that it would postpone the release of its 2022 annual report, acknowledging that it was “undercapitalized”. Subsequently, Coinbase, Paxos, and Circle stopped their business cooperation with Silvergate, and Tether and Gemini clarified that they had no exposure to Silvergate. Affected by this, their stock prices fell by nearly 60% in a single day.
As the second largest encrypted banking service provider after Signature Bank, it has close ties with multiple exchanges, market makers, and stablecoin issuers, and it has suffered a series of blows after the FTX thunderstorm. The customer squeeze from the bear market may aggravate the liquidity crisis.
But in general, Silvergate is still within the scope of SEC and banking supervision. It has accepted multiple loans and rescue funds. After the intervention of the regulatory authorities, if it can stop the serious run and boost the market and customer confidence, it is expected that the crisis will be reversed. Control within a certain range.
The transformation of community banks takes advantage of encryption
According to its own statement, Silvergate was founded in 1988 in California, USA. It was originally a community retail bank. In 2013, CEO Alan Lane was preparing to enter the encryption industry.
In terms of product form, Silvergate’s business model in the encrypted world can be divided into three sectors: lending, SEN, and the stillborn DIEM stablecoin acquired by Facebook. Among them, the lending business is mainly for mining companies Marathon and Microstrategy, followed by the SEN network, which is mainly for exchanges. The main customers are major exchanges and trading institutions, which help exchanges and customers to deposit and withdraw funds better, and play a traditional role in communication. The banking system and crypto business, and the role of the link between fiat and cryptocurrencies. As of December 2022, Silvergate has a total of 1620 customers, including 104 exchanges.
Among them, the most important business segment is SEN (Silvergate Trading Network, Silvergate Exchange Network), which enables exchanges and institutional investors to send dollars between their own Silvergate accounts and other Silvergate customer accounts without interruption, and can trade real-time settlement. The RESTful JSON APIs developed by it allow customers to query wire transfer data and avoid transaction delays caused by bank business hours restrictions. It is an important pillar behind the 24-hour operation of the global cryptocurrency market. SEN, as the main business, helps Silvergate earn transfer and service fees, accounting for about 20% of its total revenue.
The innovative business model allowed Silvergate to make a lot of money during the last round of bull market. On October 20, 2021, customer deposits reached US$112. In Q4 of 2021, SEN handled a total of more than US$200 billion in business transactions, becoming the second only The second largest crypto-friendly bank after Signature. Crypto customers among Silvergate’s top 10 depositors by the end of the third quarter of 2022 include Coinbase, Paxos, Crypto.com, Gemini, Kraken, Bitstamp, and Circle, accounting for about half of the bank’s deposits.
However, the highest proportion of income contribution is actually the lending business, and the profit model is also the conventional interest rate spread of traditional banks, that is, short-term deposits are used to buy bonds and stocks and other investments or lend, and also include low-interest digital asset mortgages. Among them, MacroStrategy received a loan of US$205 million from Silvergate in March 2022, which will expire in 2025. He also stated that he would not repay the loan in advance due to Silvergate’s bankruptcy. In order to obtain more funds Silvergate also pledged securities, received a $ 4.3 billion advance payment from the Federal Home Loan Bank.
Silvergate gets run on after FTX thunderstorm
In the capital market, Silvergate once became the darling of the stock market. Cathie Wood’s ARK Fintech Innovation, as well as State Street Bank and market maker giant Citadel have all held large shares of its stock, helping it to reach a share price of 21 on November 21, 2021. The highest point was 239 US dollars, and the market value also exceeded 7 billion US dollars. However, as the crisis spread, Silvergate’s stock price fell below the issue price of $12 on January 5 this year. What’s more serious was that more than 70% of its stocks were shorted. Soros also took the opportunity to buy 100,000 put options.
But this model is heavily dependent on the market environment. In fact, the entire encrypted banking system has already begun to suffer a serious crisis in 2022, but the most fatal impact on Silvergate is the thunderstorm from FTX. Both FTX and Alameda opened accounts in Silvergate. The U.S. Department of Justice seized its related assets.
After the collapse of FTX, the centralized withdrawal movement of various exchanges was triggered. Users’ confidence in the exchange was greatly affected and they made withdrawals. The exchange then made withdrawals from the cooperative Silvergate. Silvergate could only continue to sell its own assets to deal with the ensuing The resulting withdrawal requirements.
In Q4 of 2022 alone, Silvergate’s cryptocurrency-related deposits plummeted by 68%, and it processed more than $8.1 billion in customer withdrawals, which caused a serious liquidity and repayment crisis for Silvergate, and accumulated losses of more than $949 million. Since 2013, all the profits have been withdrawn, which is actually a state of debt operation. In Q4 of 2022, it will sell bonds worth US$5.2 billion at a cumulative discount and lay off 40% (200) of its employees to save itself.
As of December 31, 2022, the total value of cash and cash equivalents held by Silvergate exceeded US$4.6 billion, while the total customer deposits were US$3.8 billion, which can generally cover the amount of user withdrawals. However, these assets are not all current, and due to the mismatch of maturity, it is difficult to fully satisfy the user’s withdrawal request immediately. Unlike exchanges that require a full amount of reserves to respond to users’ withdrawal needs at any time, banks have always had a partial reserve system, so once they encounter a large-scale withdrawal demand in the short term, it will cause a serious run-on crisis.
So far, Silvergate has not released the 10-K report, and its solvency is a cause for concern. 10-K is a type of report that is mandated by the SEC. It is usually more in-depth than the annual report, including detailed financial statements and balance sheets. and cash flow statement. Silvergate has said it will issue, which will provide a glimpse of its solvency in 2023.
In general, because Silvergate’s business model is overly dependent on the encryption market, a bank with only more than 1,000 customers will prosper and lose all. Once it faces a crisis in the encryption market, it will easily enter a death spiral.
The key for Silvergate to tide over the difficulties lies in whether it can obtain sufficient assistance to meet customers’ withdrawal needs while stabilizing market confidence, whether there are “receivers” willing to acquire, or directly enter the zero-return mode to become the current crypto circle. Another problem. But in the future, with the tightening of encryption regulations, Silvergate’s business model relying on exchanges will not be sustainable. How to adjust its business model in the future will become a huge challenge for Silvergate itself.