Silvergate CEO: Crypto Bank Has ‘Ample Liquidity’

Blockworks
Blockworks December 6, 2022
Updated 2022/12/06 at 12:32 PM
7 Min Read

Silvergate’s customer deposits are safe, according to the cryptocurrency bank, which added that the company has “a resilient balance sheet and ample liquidity.”

In a letter addressed to shareholders, CEO Alan Lane said Monday that Silvergate’s “entire investment securities portfolio” can be used as collateral for additional lines of credit, if needed — and could “ultimately be sold should we need to generate liquidity to satisfy customer withdrawal request.”

The letter came as Silvergate’s stock sank about 8.5% Monday after Morgan Stanley downgraded its shares to “underweight” from equal weight, according to a CoinDesk report.

Morgan Stanley analysts estimated Silvergate digital deposits are down 60% so far in the fourth quarter versus the quarter prior. The bank faces pressure on net interest margins and net interest income, analysts, as it needs to fund outflows via securities sales and wholesale borrowing.

A Morgan Stanley spokesperson did not immediately return a request for comment, and a Silvergate spokesperson declined to comment beyond the chief executive’s letter.

California-based Silvergate is a federally regulated bank that has been working with institutional investors in digital assets since 2013. Its real-time payments platform — the Silvergate Exchange Network (SEN) — handled $112.6 billion in US dollar transfers during the third quarter — a 41% decrease from the prior quarter.

The stock, down about 53% in the past month, has been heavily weighed upon — along with its peers — following the collapse of crypto exchange FTX.

Lane said in the letter that speculation and misinformation abounded as the FTX saga unraveled, adding that Silvergate did extensive due diligence on FTX and Alameda Research.

“When Silvergate received payments directed to Alameda Research and credited it to the account of the same name, this was consistent with the instructions from the sender of the wire and industry practice,” Lane said.

If the bank detects unexpected or concerning activity, he added, it is investigated and a suspicious activity report may be filed.

Other analysts more bullish on Silvergate 

BTIG analyst Mark Palmer told Blockworks via an email Monday that he remains bullish on Silvergate.

“While we expect [fourth quarter] deposits to decline sequentially in the aftermath of the FTX episode, we continue to believe the Silvergate Exchange Network offers a unique value proposition to its crypto-focused clients by enhancing their capital efficiency and we expect it to remain relevant going forward,” he said.

David Rochester, an analyst at Compass Point Research and Trading, reiterated the firm’s buy rating of Silvergate in a Dec. 1 research note, but lowered its price target from $50 to $40.

The stock’s price hovered around $24 as markets closed Monday.

“While we still view [Silvergate] as a buy over the next year, we acknowledge the greater likelihood of continued near-term stock price volatility as the extent of the current contagion from the FTX bankruptcy comes to light,” Rochester said. “But our expected base case remains that recent market disruption eventually subsides, and such stabilization could support stable digital deposit levels beyond the impact of the recent market turmoil, which should drive share price outperformance from current levels.”

A timeline of Silvergate’s status since the FTX chaos 

Silvergate’s stock plunged 23% on Nov. 8 — the day Binance CEO Changpeng ‘CZ’ Zhao tweeted that the exchange was considering buying FTX “amid a liquidity crunch.”

Binance soon backed out of the potential deal, and FTX filed for bankruptcy on Nov. 11. That day, Silvergate CEO Alan Lane said in a statement that the company’s relationship with FTX was limited to deposits.

Silvergate’s total deposits from all digital asset customers totaled $11.9 billion, as of Sept. 30, and FTX represented less than 10% of those.

Lane added that week that the company uses its balance sheet to “provide liquidity for our clients while maintaining a strong capital position in excess of the well-capitalized status required by federal banking regulations.”

Palmer repeated his buy rating of Silvergate in a Nov. 15 research note, saying that the stock price’s decrease was driven in part by some assertions critical of the company on social media.

“Such statements demonstrated a lack of understanding of SI’s status as a regulated bank, the particulars of its balance sheet, and the mechanics of the Silvergate Exchange Network (SEN) and the SEN Leverage platform,” he said.

Around the same time, institutional crypto trading platform FalconX said it wouldn’t route transfers through Silvergate out of an “abundance of caution.” A FalconX spokesperson later told Blockworks that Silvergate settlements were set to be reinstated.

In a Nov. 16 press release, Silvergate said its deposits stood at $9.8 billion, which excludes deposits by FTX and its affiliates. The company added its SEN network continues to operate and was processing $1.9 billion in daily volume quarter-to-date, compared to $1.2 billion in the prior quarter.

“Silvergate, and its entire banking platform, were purpose-built to withstand periods of market volatility,” a spokesperson told Blockworks at the time.

Silvergate said last week its exposure to BlockFi, which filed for bankruptcy, amounted to less than $20 million in customer deposits, as of Nov. 28. The crypto bank added that it had no investments in BlockFi.


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