Silvergate becomes takeover bait as Crypto Bank depositors flee

The collapse in Silvergate Capital’s share price is threatening the independence of the crypto bank after the company revealed more than two-thirds of its deposits were withdrawn in the fourth quarter.

Citing “a transformational shift” in the cryptocurrency industry that led to several bankruptcies last year, Silvergate provided preliminary results for the latest quarter that showed its deposits from digital asset clients – the majority of its assets – shrank to $3.8 billion at the end of the year from $11.9 billion on Sept. 30.

The bank was quick to point out that it held $4.6 billion in cash and cash equivalents as of Dec. 31, which allowed it to more than meet the withdrawals of all of its cryptocurrency-linked customers. But the contraction of a company that held $14.1 billion of digital currency assets early last year and a market capitalization that has since dropped to $398 million from $4.5 billion , has put its existence as an autonomous company in doubt. Shares lost 43% of their value on Thursday, falling to $9.40.

Speaking on a conference call to explain the release of fourth-quarter metrics, executives raised the possibility that Silvergate could find itself a takeover target, Yahoo said, based on its bargain price. That transaction could get a boost from federal regulators, such as the Office of the Comptroller of the Currency (OCC).

“Someone will have to come to Silvergate with the examiners and find out something by Monday because it’s getting a little out of hand and this is an authorized entity,” says Paul Schulte, founder and editor of Hong Kong-based Schulte Research, who provides insight on banking and financial technologies. “I bet the OCC will be in the Silvergate offices over the weekend. They will have to clean up the bank, figure out who is at risk, how much is at stake here, who is in danger and who could lose. Can they make something happen before they open on Monday to prevent it from spreading?

He compared the situation to the 2008 bailouts of Washington Mutual and Wachovia, which were destabilized by the US housing crisis and were absorbed by bigger rivals.

Silvergate didn’t respond immediately Forbes’ request for comment.

The company’s problems stem from the nearly year-long decline in the cryptocurrency markets, which has led many of its clients to withdraw from digital assets. To fund the wave of withdrawals, which coincided with the unraveling of high-profile client FTX, Silvergate sold $5.2 billion worth of debt at a loss of $718 million and said it would fired 40% of its staff (about 200 people).

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Despite the cryptocurrency upheaval, the Silvergate Exchange Network, the bank’s real-time payments platform, continued to operate with an average daily trading volume of $1.3 billion in the fourth quarter, up from 1.2 billion dollars in the previous quarter.

The bank announced that it has shelved plans to launch its own stablecoin. It reported a $196 million loss related to the cancellation of assets of Diem, a stablecoin project founded by Meta, which Silvergate acquired last year.

The report did not include details of Silvergate’s balance sheet or income statement; the company will release its quarterly and annual earnings report on Jan. 17. The company rode the cryptocurrency boom to great heights, with its shares gaining more than 1,700% from its 2019 initial public offering of $12 a share to its late 2021 peak of $220.

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