Silvergate Closes Exchange Network, Grants $9.9M to BlockFi

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

A disclaimer on the Silvergate website states:

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

A second ruling on the same day by US Judge Michael B. Kaplan said Silvergate must return the $9,850,000 deposited by BlockFi. According to documents posted on the BlockFi Restructuring Advisor websitethe court ordered the bank to immediately release the funds following an agreement between the two companies in November 2022.

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

BlockFi is one of the crypto companies affected by the collapse of FTX last year, as did Silvergate. The cryptobank had liquidity problems due to the crypto bear market before being hit by significant outflows in the fourth quarter of 2022. resulting in a net loss of $1 billion.

Reportedly, in an effort to cushion the effect of the surge in withdrawals, Silvergate borrowed $3.6 billion by the Federal Home Loan Banks (FHLB), a consortium of 11 regional banks in the United States that provide funds to other banks and lenders.

IN report published by the US Securities and Exchange Commission (SEC), the digital asset bank highlighted heavy deposit outflows and outlined steps taken to maintain cash liquidity, including wholesale funding and the sale of debt securities. The crypto bank is standing class actions for his relationship with FTX and Alameda Research.

Fears that the liquidity crunch could lead to bankruptcy protection have increased this week since Silvergate delayed filing its 10K annual financial report. Within 24 hours of the announcement, crypto firms Coinbase, Circle, Bitstamp, Galaxy Digital and Paxos announced that they would cut back their partnerships with the bank in some capacity. MicroStrategy and Tether joined a number of firms publicly denying any significant exposure to the bank.

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

According to a short interest report from February, shares of Silvergate was the second shortest shares in the United States, with more than 72.5% of its shares short, Cointelegraph reported.

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