Wasn’t the contagion over? Not if you ask Silvergate

Wasn’t the contagion over? Not if you ask Silvergate

Summary:  In 2022, there was an avalanche of contagion rocking the crypto industry to its core, following the collapse of crypto hedge fund Three Arrows Capital, retail magnet Celsius, and exchange FTX, among other firms. Now, crypto-focused bank Silvergate is in difficulties upon losing $1bn in Q4 2022 and major clients leaving the bank in large numbers. The consequences for the industry are likely to be severe, as crypto firms scramble to find banks and liquidity dries up.


Until last week, Silvergate was one of a few cornerstones in the crypto industry. Since onboarding its first crypto-related client in 2014, the bank quickly became a favorite among crypto firms at a time when they had difficulties opening a bank account. In 2017, Silvergate doubled down on the crypto industry by launching the Silvergate Exchange Network (SEN), allowing institutional investors and market makers to instantly transfer US dollars to and from exchanges and OTC desks. The network provided Silvergate with a firm network effect, earning them a great clientele of nearly every crypto exchange and institutional investor. In November 2019, Silvergate went public with an offering price of $12, followed up by a two-year sprint to an all-time high of $222.13 in November 2021.

The collapse of FTX initiated the issues at Silvergate

Prior to November 2022, Silvergate promoted its banking services with a quote by FTX co-founder and CEO Sam Bankman-Fried on its homepage. It appears that FTX used Silvergate as its main bank for dollar withdrawals and deposits from clients, likely making FTX one of Silvergate’s largest clients if not the largest. Yet, its partnership with FTX turned ugly within the span of a few days, following the bankruptcy filing of FTX in November last year. The prominent bankruptcy of FTX did not only cause market participants to withdraw funds from exchanges and other crypto intermediaries’, fearing the insolvency of other companies, but the market also questioned whether Silvergate’s partnership with FTX could cause regulatory scrutiny, provoking Silvergate to be hit by two sides.

This double hit on Silvergate prompted clients to withdraw the majority of their deposits from the bank, effectively causing a run on the bank. In early January, Silvergate announced that it incurred a loss of $718mn by selling debt to meet clients’ withdrawals in that fourth quarter of last year. In addition, the bank cut its staff by 40% and wrote off its $182mn acquisition of Meta’s Diem project it carried out early last year.

To make matters worse, Silvergate delayed its annual 10-K report last week, stating that it needs two more weeks to complete the report. It further stated that it expects to incur further losses due to additional debt sold in January and February, saying that: “…the Company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months…”. The severe negative outlook caused multiple crypto firms to cease their relationship with Silvergate, including Coinbase, Bitstamp, Paxos, and Circle, including transfers over the Silvergate Exchange Network (SEN). On Friday, Silvergate announced that it will discontinue the SEN based on a “risk-based decision”, altogether sacrificing its competitive advantage coming from the network effect of the SEN. It appears that Silvergate is in talks with Federal Deposit Insurance Corp. officials to potentially salvage the bank. Only time will tell if these talks pay off, yet there are at this time several consequences for the crypto market.

Lower liquidity, fewer crypto-friendly banks, and regulatory scrutiny

There is only a single alternative to the SEN, namely Signature Bank’s Signet. However, it is not nearly as widely used compared to the SEN. Besides, Signature Bank has been on a spree to drastically reduce deposits from crypto to cut down risks, stressed by comments from Signature Bank CEO Joe DePaolo late last year: “We are not just a crypto bank and we want that to come across loud and clear”. This indicate that Signet is in fact not a viable alternative for the majority previously using the SEN. As long as there is no viable alternative, many market makers, OTC desks, and institutional investors are left in the dust, as they can no longer instantly deposit and withdraw US dollars and euros to and from nearly every exchange. This may limit liquidity and efficiency of the market at the expense of traders and other active market participants.

Silvergate may serve as a worst-case scenario in appealing to crypto firms for traditional banks. This may cause banks to be more cautious and less willing to offer services if it relates to crypto at all, effectively harming the industry’s ability to receive a bank account and limiting innovation in the space. Likewise, the fact that Silvergate is a US-regulated bank may prompt regulators to place the industry under severe scrutiny, as they can arguably not afford to cut the industry some slack, as the contagion has now spread to a highly regulated entity in comparison to mostly non-regulated entities failing last year. This implies that the risk of regulatory counter-pressure has increased.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992