Is Silvergate's Fall Certain? Industry Experts React To Cryptocurrency Bank's Problems

A day after cryptocurrency-focused bank Silvergate Capital Corp SI admitted that it may struggle to remain solvent due to significant losses, industry experts opine the bank's fall is only a matter of time, even as they expressed concerns about the potential domino effect on the digital assets industry.

The announcement by Silvergate Capital led to a sharp drop in its stock price, which fell by 58% on Thursday and was trading down about 3% on Friday morning; now up 4.20% Friday afternoon.

Major players in the crypto industry such as Coinbase Global Inc COIN, Galaxy Digital Holdings Ltd BRPHF and Paxos Trust have moved quickly to sever ties with the beleaguered bank.

Aegis Custody/Trust CEO Serra Wei noted that with past incidents like FTX behind us, it's no surprise that Coinbase is holding its clients' cash in FDIC-insured banks.

This level of protection for funds is similar to an insurance policy, providing an additional layer of security, Wei stated, adding that companies taking proactive measures like this to safeguard their clients' assets will likely stay on top as accountability and responsible custody practices will be critical for success in the industry's new era.

On the other hand, Gateway.fm co-founder and Chief Technology Officer Igor Mandrigin expressed concern over a crypto-bank delaying reports, particularly given the volatile nature of share prices in the industry.

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He also found the bank's reference to the "sale of additional investment securities beyond what was previously anticipated" worrying and believed that any negative news making headlines could undermine the overall ecosystem sentiment and prolong the crypto winter conditions.

Standard DAO CEO and co-founder of BattlePAC Aaron Rafferty highlighted the potential repercussions if Silvergate was complicit or aware of the unlawful transfers between Alameda and SBF/FTX, saying that it would darken the cloud for the cryptocurrency space as a whole.

Robert Quartly-Janeiro, chief security officer of the Tier-1 crypto exchange Bitrue, noted that while Bitrue has no link to the Silvergate network or its services, the collapse of California-based Silvergate now appears all but a certainty.

He further said that the market sell-off linked to Silvergate was surprising, given that question marks over the bank's financial stability have existed for some time.

Moreover, Silvergate was impacted by the FTX fallout, was selling assets at distressed valuations in late 2022 to meet financial obligations and had been looking for new capital, he said.

Meanwhile, BofA Securities Research Analyst Brandon Berman reiterated an underperforming rating on the stock.

"We note that in the event an institution becomes 'undercapitalized,' bank regulations may restrict certain activities, including asset growth. We maintain our Underperform rating," Berman noted in the research note.

Keefe, Bruyette & Woods (KBW) in its research note stated the regulatory environment around cryptocurrency banking has turned considerably more negative and onerous.

"More broadly speaking, while SI remains operational today (i.e. customers can take out and put deposits on its bank platform), this is an interesting event for the crypto industry as Silvergate was the highest regulated and most transparent counter-party in the institutional trading market, bringing into question what the banking rails of crypto could look like in the future," Michael Perito, the lead analyst at KBW stated.

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