The warning sounded like a thunderclap in the cryptocurrency industry.
Less than four months after cryptocurrency exchange FTX and its sister company, Alameda Research, both founded by Sam Bankman-Fried, filed for bankruptcy, another crypto space juggernaut is on the brink of collapse.
This is bank Silvergate Capital Corp. (SI).
The San Diego bank is considered to be the crypto bank in the young financial services industry powered by blockchain technology.
Most of its customers are crypto firms, which often have great difficulty doing business with traditional banks. They were customers until March 1, when Silvergate announced in a regulatory filing that its survival was now at stake.
The bank started by saying that it could not file its annual document, commonly known as Securities and Exchange Commission Form 10-K, for the 2022 fiscal year on time because it has to review its books. It explained that it would need more than the additional two weeks usually given to companies that are late to comply.
Review Earnings
"The company is working diligently to file its Form 10-K as soon as possible, but does not expect to be in a position to file the Form 10-K by the extension date of March 16, 2023," the firm said. It added that it needs additional time "to perform analysis, record journal entries related to subsequent events and to complete management’s evaluation of internal controls over financial reporting."
Silvergate "also needs additional time to allow its independent registered public accounting firm to complete certain audit procedures, including review of adjustments not yet recorded and the evaluation of the effectiveness of the company’s internal control over financial reporting."
But most worrying is that the bank says it has to analyze new events linked to investigations by regulators. It provided no further details.
The firm "is currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company," Silvergate said, adding that "the company’s independent registered public accounting firm is also requesting detailed information relating to such matters and the company is responding to such requests."
The bank "is still preparing analyses and providing documentation requested by its independent auditors in connection with their review."
Basically, the results for the fourth quarter of 2022 and those for full year 2022, announced on Jan. 17, are going to have to change, Silvergate suggests. The figures announced to investors are not accurate and will have to be adjusted.
Business with Binance
Last month, Reuters reported that Binance, the world's largest cryptocurrency exchange, had access to a bank account belonging to its American subsidiary Binance.US. The bank account was held at Silvergate Bank.
Binance executives transferred hundreds of millions from this account to a trading platform, Merit Peak. The manager of Merit Peak was Changpeng Zhao, the founder of Binance and major rival of Sam Bankman-Fried.
At the time, Binance.US executives were unaware of these money movements and learned about them after they were made, according to Reuters, which cited text messages between the CEO of Binance.US and a Binance executive.
Money transfers had started at the end of 2020. In the first three months of 2021, more than $400 million were transferred.
Binance.US dismissed the information, saying in a tweet that "only Binance.US employees have access to Binance.US bank accounts. Period."
The parent company didn't comment.
The information from Reuters immediately prompted many experts to say that this episode is reminiscent of FTX and Alameda Research.
FTX and Alameda Research were supposed to be independent, but according to the Department of Justice and the SEC, they maintained an incestuous relationship. Bankman-Fried is accused of transferring $10 billion in client funds from FTX to Alameda.
FTX was using the client cryptocurrencies as collateral to borrow money, which in turn it transferred to Alameda Research. Alameda used this money to invest in crypto businesses and also for trading operations.
Nothing says that this is what was happening between Binance.US and Binance.
Shares Fall Nearly 58%
Going back to Silvergate, the bank says its finances are going to have to change. In mid-January, the firm announced that it had recorded a net loss of $948.7 million in 2022, compared to a net profit of $75.5 million in 2021.
"A number of circumstances have occurred which will negatively impact the timing and the unaudited results previously reported in the earnings Release, including the sale of additional investment securities beyond what was previously anticipated and disclosed in the earnings release primarily to repay in full the company’s outstanding advances from the Federal Home Loan Bank of San Francisco," the bank said.
It added that it sold additional debt securities in January and February and expects to record further losses related to the other-than-temporary impairment on the securities portfolio.
These additional losses will negatively impact the regulatory capital ratios of the company and "could result in the company and the bank being less than well-capitalized," Silvergate warned.
"The company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements. The company is currently in the process of reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces."
These announcements and warnings sent Silvergate shares down nearly 58% in one session. Share prices that had closed at $13.53 on March 1 were at $5.72 after the single trading session following the announcements.
In addition to the stock market liquidation, Silvergate has also just been let go by a large majority of its crypto customers.
Coinbase (COIN), Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy Digital and Gemini all announced on March 2 that they would suspend automated clearing house (ACH) transfers and other business operations with the bank. LedgerX, a crypto derivatives provider was the first to cut ties with Silvergate.
"In light of recent developments & out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate," indicated the platform, the only publicly listed American cryptocurrency exchange.
It added: "Coinbase has de minimis corporate exposure to Silvergate."
Silvergate's troubles are also affecting the cryptocurrency market, which is down 4% in the past 24 hours to $1.08 trillion, according to data from CoinGecko. Bitcoin was down 4.4% at $22,348.98, while Ether was down 4.6% at $1,565.73.
