Silvergate Bank was founded in San Diego in 1988 as a savings and loan union (S&L) that was all the rage at the time. It is now a “leading provider of innovative financial infrastructure solutions for the growing digital currency industry.”
According to its official website, Silvergate serves cryptocurrency companies, including more than 1,300 fintech firms, which tend to have difficulty maintaining relationships with banks. So it’s perhaps no surprise that Silvergate’s assets under management (AUM) have grown rapidly over the past few years. The stock price has also increased by more than 1500% from November 2019 to November 2021.
However, after the FTX bankruptcy, customers left Silvergate, with asset withdrawals amounting to $8.1 billion in Q4 2022, nearly 70% of total deposits. US Senator Elizabeth Warren sent a scathing letter to Silvergate questioning its ties to FTX and Alameda Research. Shares have tumbled in response, down more than 40% in the past month.
I’m not trying to spread unease about Silvergate’s solvency. Silvergate has been able to meet withdrawals from customers, laid off 40% of its workforce, and cut costs, including digital currency project Diem, which it acquired from Meta (formerly Facebook) last year. It is also working to cut costs by abandoning cumbersome ideas.
However, what should be noted here is how Silvergate responded to withdrawals.
Utilize a mechanism for the housing industry
Last November, I wrote that the crypto credit crisis was “unlikely to spread to other markets,” and Silvergate has proven me wrong.
To meet the surge in withdrawals, Silvergate took out billions of dollars in loans from San Francisco’s Federal Home Loan Bank (FHLB). Silvergate will end 2022 with a $4.3 billion loan from FHLB on its balance sheet. By the way, as of the end of September 2022, the loan from FHLB was only $ 700 million (about 89 billion yen).
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To be honest, I didn’t know much about FHLB when I first heard the news. But even if the name doesn’t sound strange, FHLB’s mission statement is enough to “provide members with a reliable source of financing for their home loans.”
The FHLB system (Federal Home Loan Banking System) was created by the Federal Home Loan Bank Act of 1932 during the Hoover administration with ambitious goals. Lowering the cost of owning a home. FHLB provides liquidity to smaller member banks like Silvergate. So, in this case, part of the cryptocurrency industry has been bailed out by a government agency whose goal is to bring down the cost of buying a home.
Respond to short-term needs of member banks
Of course this is not illegal. If it was illegal, it would already be in the news. FHLB’s mission is to provide “liquidity for the short-term needs of member banks,” and withdrawing 70% of deposits is exactly what liquidity is needed. FHLB will also support member banks that support housing finance and community investment (for whatever purpose).
If the role is so vague, this case is not illegal.
But just because it’s not illegal doesn’t mean it isn’t questionable. Of course, I’m glad that Silvergate didn’t go bankrupt, but isn’t it just bailed out?
If it is partly backed by the government, crypto advocates will have a hard time convincing investors that crypto is solid.
What does independence from traditional financial institutions mean?
Do crypto assets need a boost? If so, maybe it shouldn’t even exist in the first place.
If an entity like a bank does not want to take the risk of a decline in cryptocurrency investment, it would not be desirable for depositors and loan portfolios to be almost entirely filled with cryptocurrency companies. Banks may need to manage risk through stricter collateral rules or broad diversification across many other industries.
In addition, FHLB lending precedes coverage by the Federal Deposit Insurance Corporation (FDIC) in the event of a bank failure. Why should we care?
As John Heltman wrote in the trade publication American Banker, “Regulators have reportedly closed banks, such as Silvergate, that were involved in crypto assets and received loans from mortgage banks. Its failure, then, would put a strain on the[FDIC’s]Federal Deposit Insurance Fund.”
Such a scenario wouldn’t do catastrophic damage to the FDIC, which is a member of every bank in America, but it would highlight that the cryptocurrency industry is no longer an independent entity.
So, unlike what the Federal Reserve said in December, the crypto industry’s credit crisis has indeed propagated a bit to the ‘real’ economy. Of course, the cryptocurrency industry is still small. With tens of trillions of dollars in US bank deposits, Silvergate is really tiny in comparison.
But more similar news will come from financial institutions that serve cryptocurrency companies. If cryptoassets were born to separate themselves from traditional financial institutions, they shouldn’t be turned to them in times of trouble.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: T. Schneider / Shutterstock.com
｜Original: President Herbert Hoover Saves the Day for a Crypto Bank? Yeah, That’s Weird