Silvergate’s Crisis Gives Regulators Ammunition to Keep Crypto from Mainstream Banking

By Pymnts

Silvergate’s existential crisis may give regulators the ammunition they need to keep crypto and mainstream banking separate.

As reported here, Silvergate Capital said in a U.S. Securities and Exchange Commission filing this week that a slew of issues could impact its “going concern” viability. In SEC-document-speak, we note that essentially means there’s the risk of shutdown and unwinding of operations.  

As to the ripple effects of what might happen should Silvergate cease to be a going concern — well, that’s unclear at the moment. But Thursday’s action in the stock market — where the shares are down 47% — shows a crisis of confidence.

The SEC filing noted that there are “regulatory and other inquiries and investigations that are pending with respect to the company.” The company’s accountant is also looking for some details on finances. The investigations and scrutiny are tightening from the likes of the U.S. Department of Justice and Congress.

One of the issues — among the many issues — is the intertwining of mainstream banking and crypto-related banking. As noted by several senators in a letter earlier this year, there are concerns about using the Federal Home Loan Bank (FHLB) program to boost its balance sheet.

 “By using the FHLB as its functional ‘lender of last resort,’ Silvergate has further introduced crypto market risk into the traditional banking system,” the senators wrote. “If Silvergate were to fail — as have banks facing a fraction of the withdrawal rates Silvergate has faced — it could leave the FDIC — and therefore the American taxpayer — holding the bag.”  Silvergate detailed in January that it held $4.3 billion in “short term” Federal Home Loan Bank of San Francisco advances. At the end of the year, the company detailed, it also held $2.4 billion in brokered certificates of deposit. And in response to what is akin to a banking run — the crypto firms holding deposits at Silvergate were facing their own liquidity crunches amid crypto routs in recent months — Silvergate had been selling securities and derivatives to shore up liquidity.

Silvergate’s model straddles crypto and the traditional financial system: The company is a registered bank holding company that is subject to supervision by the Fed, and deposits are insured up to legal limits by the FDIC. 

And Silvergate provides financial services — commercial banking, mortgage lending and asset-based lending — to digital-currency clients.

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