Crypto-Focused Silvergate Debacle Unlikely to Spread to Broader Banking

Felice Maranz, Bloomberg News

A pedestrians walks up a staircase across from the Silvergate Bank headquarters in La Jolla, California, US, on Sunday, Feb. 5, 2023. Silvergate Capital Corp. shares slumped on news that US prosecutors are looking into the banks dealings with fallen crypto giants FTX and Alameda Research. , Bloomberg

(Bloomberg) -- A rare run on a US bank is unfolding at the moment as crypto-focused Silvergate Capital Corp. plunges. But the damage to the broader financial system is likely contained, as the trouble facing Silvergate is particular to the bank and mostly limited to its customers and other crypto-linked firms.

Silvergate’s shares sank more than 50% after the company raised concerns about its viability, recalling worries about contagion from the collapse of Sam Bankman-Fried’s FTX. A host of cryptocurrency firms, including Coinbase Global Inc. and Galaxy Digital, say they won’t accept or initiate payments through Silvergate, in an exodus which threatens the bank’s SEN network (its key source of deposits and a platform for crypto participants to transfer money among each other), according to a Bloomberg report. The precarious status of the bank — which holds federally insured deposits and more than $11 billion in assets — will add fuel to the debate among lawmakers and regulators over whether banks can manage crypto risks.

There have only been a dozen US bank failures since 2017. Usually failures are due to weaknesses in credit quality, with losses overwhelming balance sheets, according to Bloomberg Intelligence’s Herman Chan. Silvergate’s situation is different, “as it’s more of a bank run with deposits exiting faster than the bank can handle,” he says. Plus, Silvergate is a different breed of bank as most assets are in cash and securities, and deposits are concentrated among crypto-focused clients. Crypto customers will need to find another bank, which may be difficult since no other bank really wants those deposits at this point, due to intense scrutiny from regulators, according to Chan.

Meantime, a bipartisan group of US Senators alleges Binance is a “hotbed” of illegal activity, and seeks detailed accounting about the firm’s finances and compliance efforts. And Securities and Exchange Commission head Gary Gensler is warning money managers about crypto custody (and AI). Bitcoin pared losses in US afternoon trading Thursday, shedding around 0.1%, as other risk assets rallied after the Federal Reserve’s Raphael Bostic said the central bank could be in a position to pause by mid-to-late summer.

NOTE: Felice Maranz writes for Bloomberg’s Markets Live blog. The observations she makes are her own and not intended as investment advice. For more markets commentary, see the MLIV blog.