Silvergate Raced To Cover $8.1 Billion in Withdrawals During Crypto Meltdown

The collapse of crypto exchange FTX sparked a run on Silvergate Capital, forcing the bank to sell assets at a steep loss to cover some $8.1 billion in withdrawals. From a report: Crypto-related deposits plunged 68% in the fourth quarter, the bank said in an early release of some quarterly results. To satisfy the withdrawals, Silvergate liquidated debt it was holding on its balance sheet. The $718 million it lost selling the debt far exceeds the bank's total profits since at least 2013. The bank has laid off 40% of its staff, or about 200 employees, and said it would pare back its businesses. It shelved a plan to launch its own digital currency, writing off $196 million it spent buying the technology that Facebook had built in its failed attempt to start a crypto-based payments network. Silvergate caters to companies in the crypto business, taking their deposits and operating a network that links investors to crypto exchanges.

FTX and other companies controlled by its founder, Sam Bankman-Fried, accounted for about $1 billion of the bank's deposits. Silvergate was able to survive such a steep decline in deposits because it isn't structured like most banks. It sold off much of its traditional banking operations and branches to focus on providing bank accounts to crypto exchanges and investors. Crypto-related deposits account for some 90% of the bank's total, and it keeps almost all of its deposits in cash or easy-to-sell securities. The bank said it remains committed to crypto and has the funding to handle a "sustained period of transformation."

The value of centralized finance

[Ed Tice]

We've had many of these discussions around what would happen if there were a run on a modern-day bank and why they are different than non-bank crypto-companies. This is perfect example. There was a run on a bank and depositors got paid in full. The bank had to take somewhat of a loss as they weren't able to replace the deposits and had to sell debt. Not great for the banks profits, but no depositors lost money. Can't wait to see how the decentralized finance crowd tries to spin this one!

Re:The value of centralized finance

[Registered Coward v2]

We've had many of these discussions around what would happen if there were a run on a modern-day bank and why they are different than non-bank crypto-companies. This is perfect example. There was a run on a bank and depositors got paid in full. The bank had to take somewhat of a loss as they weren't able to replace the deposits and had to sell debt. Not great for the banks profits, but no depositors lost money. Can't wait to see how the decentralized finance crowd tries to spin this one!

I suspect they will spin it as "see - crypto's safe. You can get your deposits;" while ignoring how the bank used the deposits to buy cash equivalents or kept the cash and when crypto melted down those items didn't so they could cover withdrawals. They were fortunate to have liabilities that dropped in value while their assets didn't. Had it gone the other way and depositors decided to cash out the ending may have been different; even an influx of deposits now could result in problems if crypto recovers. All of a sudden the bank's assets would not have grown enough to cover liabilities if a run occurs.

The investors are probably better off returning all deposits and keeping the $ billion r so that remains after shuttering the bank.

Re:The value of centralized finance

[Ed Tice]

I don't think that's what Silvergate did at all. I believe that they accepted the crypto-deposits and held them as the actual tokens. They also had normal USD deposits and operations. They simply used the market-value of crypto-currency deposits as part of their reserve requirements and did so with banking regulator approval. Since, normally, reserve requirements aren't the limiting factor in lending (that's capital requirements), it probably didn't matter much. And they made money on cyrpto-currency payment services in addition to normal banking operations. When they crypto was all withdrawn, they suddenly couldn't meet their reserve requirements (very rare for a bank) and had to sell assets to meet reserve requirements. We don't know exactly what those assets were. That caused them to lose money which lowered their capital reserves but no so much that the FDIC came in and shut down the bank. The result would have been the same if USD $8.1 billion had been withdrawn from a bank their size.

I'm confident that they didn't sell the crypto-assets and hold cash. This would have been immensely profitable in the current circumstance but would have made the bank *very* net short on crypto-currencies and an FDIC-insured (and therefore properly regulated) bank could never take this type of risk. If the value of tokens had increased, they would have been wiped out and the FDIC would have had to cover the losses.

This is a great example of why banks and crypto-scams that look like banks are wildly different.

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[stabiesoft]

My understanding is all silvergate did was hold the cash for the crypto companies. They gave zero interest to those companies and used the cash to make real loans. This was particularly profitable as they were paying zero interest for the money they loaned out. They got caught a bit as the crypto people withdrew all their cash at once and silvergate had to find ways to get cash fast and lost some money since obviously silvergate cannot call your mortgage loan. I think they actually sold some of the loans to

Re:

[Ed Tice]

Per their web site today, SilverGate seems to do two things. The first is that they facilitate crypt-transactions which basically I assume to be largely what you said. They will exchange crypto to cash for a fee and nicely hold the cash free of charge. They also do commercial lending and, in some cases, will accept crypto-currency as collateral. It's those loans that they probably had to sell. Although they can't call a mortgage loan, those sell at relatively close to face value. A crypto-backed loan

It's not that Silvergate bought assets

[rsilvergun]

it's that they're a real bank. A dodgy bank since they specialized in crypto, but a bank nonetheless. So they're much more closely watched on deposits and the people running it are a bit more aware of the jail sentences they'll get if they run off with the deposits. As a result they were more careful with the money and had it to give.

NYC just settled with Coinbase for $50 million around money laundering, so the regulatory noose is tightening though. Without money laundering crypto won't last long. I'm s

Re: The value of centralized finance

[lostmy4digitUID]

If there's a run on traditional banks it doesent always end as rosy as you think. Lookup Iceland in the 2008 financial crisis. People lost 90% of what they had deposited. Im not saying crypto is any better. Just that when shit hits the fan that cold hard cash under your mattress is what could keep you alive. Cash is king.

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[muh_freeze_peach]

assuming people will always accept rectangles of printed papers that have pretend value is just as silly

Re: The value of centralized finance

[Ed Tice]

My understanding is that those whose deposits were held in domestic branches of Iceland banks were paid. But those who had deposits in foreign branches were not. That's true for US FDIC insurance as well. If you have deposits in a foreign branch of a US bank, you aren't covered. If you are doing anything other than depositing in banks of your home country in your home country, it's important to understand what might or might not be covered.

Re:

[quantaman]

We've had many of these discussions around what would happen if there were a run on a modern-day [...] crypto-companies. This is perfect example. There was a run [...] and depositors got paid in full. [...] Can't wait to see how the decentralized finance crowd tries to spin this one!

Sounds awesome!

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[w1z7ard]

Centralized exchanges and lenders had liquidity problems. Decentralized exchanges and lending protocols did not and do not.

Re:

[Comrade Ogilvy]

Putting it that way is the next best thing to an outright pants on fire lie, but at least you earn virtue signaling points from the crypto bros.

"Liquidity" is about ease, speed, and sufficiently predictable price stability of converting one asset to another asset, usually one recognized as possessing high liquidity (e.g. gold bullion to yen, etc.).

If you happen to care about liquidity, decentralized exchanges and lending protocols give no guarantee whatsoever, and what they provide is often completely awful

Re:

[Comrade Ogilvy]

Please ignore previous comment. Sorry about that.

Re: The value of centralized finance

[sectokia]

This is only because these guys run probably not because of government centralisation. Have a look at the gfc, all the banks were going to fold and not pay depositors and it was only the governments who gave them money to stay running, even though they were all running under centralised regulatory system with full audits.

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[gweihir]

Can't wait to see how the decentralized finance crowd tries to spin this one!

They will do what pathological liars usually do when faced with hard facts: They ignore them.

Time to update the website

[sdinfoserv]

Their website still claims they’ve been consistently profitable in 20+ years, https://www.silvergate.com/abo... [silvergate.com]
Yet the collapse of crypto more than negated all profit since they entered the digital currency realm 10 years ago. I wonder if the newly unemployed 40% of staff pushed crypo on their clients as a safe "investment".