The La Jolla, a Californian company said Friday evening that it’s suspending its Silvergate Exchange Network (SEN) but “other deposit-related services remain operational.” The announcement came about an hour after Moody’s downgraded Silvergate’s bank deposit rating from Ba3 to Caa1, hitting hard on the bank’s high credit risk.
The Silvergate crisis has begun since November, as it faced both financial losses and regulatory probes largely due to the collapse of FTX and hedge fund Alameda Research, one of its significant clients. The bank’s stock is down 95% over the past year.
In a filing dated March 01, Silvergate Bank has delayed the filing of its annual 10-K report. The bank has requested an additional two weeks to complete the report for the 2022 fiscal year. It anticipated further losses beyond a nearly one billion drop in net losses it reported in January preliminary results for Q4.
A 10-K report is a comprehensive annual report publicly traded companies in the United States must file with the Securities and Exchange Commission (SEC). The report provides a detailed overview of the company’s financial performance, business activities, and risks.
The bank also cited pending regulatory investigations, lawmaker inquiries, and its “ability to continue as a going concern for the twelve months following the issuance of these financial statements.”
Many crypto giants in the US have announced to end their relationship or have no relationship with Silvergate Bank, including Coinbase, Galaxy investment fund, stablecoin company Circle and Paxos, the investment company MicroStrategy, etc.
What happens next to Silvergate?
The foreseen scenario is that Silvergate files for bankruptcy. Or in a more optimistic case, Silvergate, as an FDIC-insured bank, could go into receivership.
Receivership is an action when a “receiver” or trustee is appointed to take over the business to protect creditors — especially those with secured loans. Unlike bankruptcy, this is not a legal action and it’s geared toward protecting a company’s lenders instead of borrowers (as is the case in bankruptcy).
Jesse Austin, a former partner with King & Spaulding’s bankruptcy practice, explained that in the case of receivership, the decision and execution will be made by two banking regulators – the Federal Deposit Insurance Corporation (FDIC) or California’s Department of Financial Protection and Innovation (DFPI) – who could declare Silvergate Bank inadequately capitalized.
“If California’s baking regulator or the FDIC finds Silvergate under-capitalized, the FDIC will then come in and close down the bank,” Austin said in an interview with Yahoo Finance.
Austin added that though the bankruptcy code prevents explicitly a bank from filing for chapter 11 or chapter 7 bankruptcy, Silvergate’s holding company, Silvergate Capital, could still file for bankruptcy — especially if it has other valuable assets besides customer deposits. In this case are the SEN networks and stablecoin assets purchased from Meta’s shuttered project, Diem, in January of last year for 1.2 million shares and $50 million in cash.