Silvergate Shuts Down Exchange Network, Releases $9.9M to BlockFi

Crypto bank Silvergate announced on March 3 that it is shutting down its digital asset payment network, claiming the termination is a “risk-based decision.” The move comes after the bank’s stock fell more than 59% in the past five days amid fears of a potential bankruptcy.

A disclaimer on Silvergate’s website said:

“Effective immediately, Silvergate Bank has taken a risk-based decision to discontinue the Silvergate Exchange Network (SEN). All other deposit-related services remain operational.”

Another ruling on the same day by US Judge Michael B. Kaplan said Silvergate must return $9,850,000 paid by BlockFi. According to documents published on the website of BlockFi’s restructuring advisor, the court ordered the bank to immediately release the funds following an agreement between the two companies in November 2022.

Screenshot from Silvergate’s website on March 4, 2023. Source: Silvergate

BlockFi is one of the crypto firms affected by the FTX collapse last year, as was Silvergate. The crypto bank had liquidity problems due to the crypto bear market before it was hit by significant outflows in the fourth quarter of 2022, leading to a net loss of $1 billion.

In an effort to cushion the effects of a surge in foreclosures, Silvergate reportedly borrowed $3.6 billion from the US Federal Home Loan Banks System (FHLB), a consortium of 11 regional banks across the US that provide funds to other banks and lenders.

In a report released by the US Securities and Exchange Commission (SEC), the digital asset bank highlighted the large outflows of deposits and outlined the steps taken to maintain cash liquidity, including wholesale financing and the sale of debt securities. The crypto bank faces class action lawsuits over its relationship with FTX and Alameda Research.

Fears that a liquidity crunch could result in bankruptcy protection rose this week after Silvergate delayed filing its annual 10K financial report. Within 24 hours of the announcement, crypto firms Coinbase, Circle, Bitstamp, Galaxy Digital and Paxos announced that they will be scaling back their partnerships with the bank in some capacity. MicroStrategy and Tether joined a number of firms that publicly denied any meaningful exposure to the bank.

Silvergate Capital Corp. Market Overview 27 February – 3 March 2023. Source: Google Finance

According to a February Short Interest Reporting, Silvergate stock was the second most shorted stock in the US, with over 72.5% of its shares shorted, Cointelegraph reported.

Silvergate did not immediately respond to Cointelegraph’s request for comment.