(Bloomberg) – Silvergate Capital Corp. Shares plunged after the bank said the collapse of the crypto industry triggered a run on deposits, prompting the company to sell assets at a loss and lay off 40% of its staff.
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Customers withdrew about $8.1 billion in digital asset deposits from the bank during the fourth quarter, forcing it to sell securities and related derivatives at a loss of $718 million, according to a statement on Thursday. Executives said on a conference call that Silvergate could become a takeover target.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we have taken proportionate steps to ensure that we maintain liquidity to meet potential deposit outflows, and we currently maintain a cash position greater than our digital asset related deposits,” Chief Executive Alan Lane said in the statement.
The collapse of Sam Bankman-Fried’s FTX sparked a crisis for Silvergate, which held deposits for FTX units and Alameda Research, the trading company at the heart of the crypto exchange’s downfall. Lawmakers are also reviewing the bank.
Silvergate plunged 44% to $12.34 at 9:48 a.m. in New York, the biggest drop since the La Jolla, Calif.-based company’s IPO in November 2019. The stock fell by 91% in the last 12 months. Signature Bank, which said in December it intended to remove up to $10 billion in digital asset customer deposits, fell 5.8% to $111.05.
“The digital asset industry has undergone transformational change, with significant over-indebtedness in the industry leading to several high-profile bankruptcies,” Silvergate said in the statement. “These dynamics have triggered a crisis of confidence across the ecosystem and led many industry players to move to a ‘risk-free’ stance on digital asset trading platforms.”
The company said it “still believes in the digital asset industry” and is committed to maintaining a “highly liquid balance sheet with a strong capital position.” Executives said on the conference call that Silvergate’s focus on the crypto industry would likely make it a takeover target for a larger institution that wants to enter the space.
Silvergate’s total deposits with digital asset customers fell to $3.8 billion at the end of the fourth quarter. He said the workforce reductions amount to about 200 positions.
The Wall Street Journal reported on the deposit withdrawals and job cuts earlier Thursday.
Silvergate once saw the crypto industry as a huge opportunity for growth. Over the course of a decade, it has transformed from a small business catering company into a publicly traded company known for providing banking services to major crypto clients such as Coinbase Global Inc. and Gemini Trust Co. – as well as FTX and Alameda Research.
The arrangement was going well, with Silvergate shares hitting an all-time high of $222.13 in late 2021 as digital asset prices set record highs. Then a painful crypto winter set in, with the value of virtual coins sinking, followed by FTX and its sister entities going bankrupt in November.
The thesis behind Silvergate’s crypto-focused payment platform, known as the Silvergate Exchange Network, is relatively simple: Crypto companies that might otherwise struggle to find a banking partner can put their money on the platform and send it to each other in exchange for digital assets. Silvergate’s network is only for US Dollars and Euros, and virtual currency transactions do not take place on the platform.
Deposits placed on the system do not earn interest, giving Silvergate an almost free method of funding its business, and customer deposits in digital currency have ballooned in the heyday of crypto. With the staggering collapse of the Bankman-Fried empire, however, Silvergate’s big bet on crypto made it a target of short sellers and caught the eye of lawmakers, including Senator Elizabeth Warren.
–With the help of Yueqi Yang.
(Updated share prices in fourth paragraph.)
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