Thursday, January 19, 2023

Silvergate Saved by Federal Home Loan Bank

Cryptobank Silvergate would likely be defunct if it had not received billions in advances from the Federal Home Loan Bank of San Francisco.  CryptoSlate reported:

Silvergate Bank received $4.3 billion from the San Francisco-based Federal Home Loan Bank last year, following the collapse of crypto exchange FTX, according to the firm’s Q4, 2022 flings.

As of December 31, 2022, Silvergate held total cash and cash equivalents of approximately $4.6 billion, which is in excess of deposits from digital asset customers.  

At December 31, 2022, the Company held $4.3 billion of short-term Federal Home Loan Bank advances.  

Silvergate’s 10 biggest depositors, including Coinbase, Paxos,, Gemini, Kraken, Bitstamp, and Circle, represented about half of the bank’s deposits.

Paxos received a national bank charter in April 2021.  At the time Paxos General Counsel said:

“The national charter was designed expressly to allow banks to conduct business across state lines more easily. This flexibility allows a young company like Paxos to focus resources on building great products. A national Trust Bank charter provides us with flexibility to operate across the US while continuing to adhere to the highest regulatory standards.”

He added that the approval would “further support our approach to innovation within regulation and drive important long-term benefits for our clients”.

There is very little regulation for cryptocurrencies.  The American Banking Association opposed granting Paxos a bank charter.

The American Banking Association opposed the application arguing that the information in its application was “vague” and the descriptions it provided about its cryptocurrency and fiduciary activities “was not sufficient” for a trust charter.

ABA CEO Rob Nichols said in a recent podcast published by financial consultancy Barefoot Innovation Group that “there should be some degree of levelness as it pertains to supervision and consumer protection” for new market entrants offering bank-like services.

He added that, in future, should a bank-like entity want to enter the US marketplace, regulators must “be careful” and think about what it means “for the overall system, and its safety and security”.

The public learned of Silvergate's $4.3 billion FHL bank loan via an SEC filing.  Paxos is not publicly traded, thus no SEC filing is available.

FHL Banks website cites its "safety and soundness."

The FHLBanks have never incurred a loss on an advance in their more than eight decades of existence. This record is attributed to the collateralization of all advances, conservative underwriting standards and strong credit monitoring policies. All of the FHLBanks’ lending is fully collateralized. Additionally, if a loan in a pool of collateral is underperforming, it must be replaced. The credit profiles of members are actively monitored. FHLBank investments are also very safe. By regulation, they are prohibited from purchasing non-investment grade securities and nearly all of their investments are triple-A rated.

Crypto is the near opposite of a safe investment.  Economist Nouriel Roubini said in Davos:

"Literally 99% of crypto is a scam. A criminal activity. A total real-bubble Ponzi scheme that is going bust."

Paxos needed capital during the crypto winter.  Did it get it from investors, like Carlyle Group co-founder David Rubenstein? Or did a FHL Bank come to the rescue like one did for Silvergate?  Maybe both?  We may never know.

Update 1-20-23:  Crypto lender Genesis declared bankruptcy for its holding company and two affiliates.  The Street reported:

Crypto lender Genesis Global Holdco LLC filed for bankruptcy on January 19.  Genesis (GGH) and two subsidiaries Genesis Global Capital et Genesis Asia Pacific have filed for Chapter 11 bankruptcy protection in the Southern District of New York.

JP Morgan CEO Jamie Dimon said:

At the World Economic Forum in Davos, Switzerland, on Thursday, Dimon bashed cryptocurrencies as a distraction.  

“I think all that's been a waste of time and why you guys waste any breath on it is totally beyond me,” he told CNBC. “Bitcoin itself is a hyped up fraud. It’s a pet rock.

So Silvergate is pet rock bank? 

Update 3-9-23:  Silvergate Bank will be unwound.  

On Thursday several crypto firms made statements meant to distance themselves from crypto-friendly bank Silvergate, which saw shares free fall on Thursday after the company delayed its annual report and said it would report further losses.

Coinbase, Paxos, Galaxy Digital, Gemini, BitStamp, and Circle each issued statements saying they have cut ties with a once crucial partner linking them to the traditional bank system. MicroStrategy has also addressed concerns for its Silvergate loan in the event the bank faces insolvency.