Coinbase, Galaxy Digital Abandon Silvergate After Bank Warns About Its Viability

Cryptocurrency heavyweights including Coinbase Global Inc and Galaxy Digital on Thursday dropped Silvergate Capital Corp as their banking partner after the lender's latest filing raised questions about its ability to stay in business.

Coinbase and Galaxy Digital also said they had minimal exposure to Silvergate, which has been plunged into a crisis stemming from a bank run after the collapse of major crypto exchange FTX in November spooked investors.

On Wednesday, La Jolla, California-based Silvergate delayed its annual report and said it had sold additional debt securities - investments that can include bonds and notes - to repay debts this year and was evaluating the impact of these events on "its ability to continue as a going concern."

Stablecoin issuers Paxos and Circle, Cboe's digital asset exchange, crypto exchange Gemini and European crypto exchange Bitstamp also suspended their partnerships with Silvergate.

"It is now getting increasingly difficult for crypto companies to establish or sustain relationships with a U.S. bank," said Ivan Kachkovski, FX and crypto strategist at UBS.

"This could potentially mean a certain trend towards crypto offshorization, at least until more comprehensive regulatory framework is established in the U.S."

Silvergate's shares ended the day at a record low of $5.72, down more than 97% from the stock's all-time high in November 2021.

Silvergate, one of the most influential banks in the digital asset industry, has drawn the ire of lawmakers in the United States over its dealings with FTX and Alameda.

In January, a bipartisan group of U.S. senators sent a letter to Silvergate, asking for details of the bank's risk management practices and alleging its due diligence processes "failed miserably."

"This does not bode well for the whole crypto market, as Silvergate is a major player in the space," said Marcus Sotiriou, analyst at digital asset broker GlobalBlock.

"The result of this remains to be seen, but we could potentially see a contagion from crypto businesses who use Silvergate Bank being impacted," Sotiriou added.

Silvergate was founded in 1988 and ventured into crypto in 2013. After high interest rates and the bankruptcy of FTX rattled crypto markets last year, the company reported a loss of $1 billion for the fourth quarter and slashed head count by 40% in a bid to cut costs.

Coinbase, which was earlier one of Silvergate's top clients, said it would partner with Signature Bank and others to facilitate cash transactions for institutional clients who had parked funds with the exchange.

Silvergate "to some degree has become a lightning rod victim of circumstances, given industry news flow over the last few months," Canaccord Genuity analysts wrote in a note after the disclosure.

The bank has also become a target for short sellers. Short interest in Silvergate stock is estimated to be as much as 22.6 million shares, or 82% of the float, making it the most shorted stock in the United States in terms of percentage of float, according to data from analytics firm S3 Partners.