What happened
Many cryptocurrencies are falling today, despite a slightly positive day for most major market indices and the Dow Jones Industrial Average rising more than 343 points. However, the severe struggles of one of the main U.S. crypto banks seem to have investors on edge.
Since late afternoon yesterday, the price of the meme token Shiba Inu (SHIB -1.41%) traded 4.5% lower as of 4:05 p.m. ET today. Shares of other altcoins like Solana (SOL -2.06%) and Cardano (ADA -2.36%) traded roughly 4.4% and 4.3% down, respectively.
So what
The big crypto-related news came after the market closed yesterday when the crypto bank Silvergate Capital (SI -57.72%) reported in a regulatory filing that it would need to delay filing its annual report with the Securities and Exchange Commission (SEC).
Image source: Getty Images.
The news comes after Silvergate earlier this year reported that it had seen close to 70% of its deposits leave the bank in the fourth quarter of 2022, leading the bank to sell a large amount of bonds while they traded at a loss, which wiped out a lot of shareholder equity. The company earlier reported a more than $949 million loss for the fourth quarter.
But in this updated filing with the SEC, Silvergate said that since the fourth quarter, the bank has sold additional bonds at losses, which will adversely impact regulatory capital and could lead the company’s capital levels to fall below regulatory requirements.
As a result, Silvergate said it “is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements.” Silvergate added that it’s currently reevaluating its business due to regulatory challenges, which include heightened oversight and regulatory investigations.
To make matters worse for the company, the large crypto exchange Coinbase (COIN -1.50%), which is likely one of Silvergate’s largest remaining clients, announced that it would no longer use Silvergate to facilitate payment transactions “out of an abundance of caution.” Other clients have reportedly left Silvergate as well. Silvergate’s stock plummeted by close to 58% today.
Silvergate is important for the crypto ecosystem because it provided critical infrastructure with its real-time payments network for fiat dollars that could better facilitate crypto transactions, because cryptocurrencies trade around the clock and the U.S. banking system operates on a lag. Most major crypto exchanges and many large institutional crypto traders had used Silvergate’s payments system and brought large sums of deposits the bank didn’t have to pay any interest on.
But FTX had been a large client of Silvergate, and the firm’s uncovered scandal and ensuing bankruptcy put a lot of heat on Silvergate. While it seemed like most of the damage had been done after Q4, there was still the question of whether regulators would come down hard on Silvergate for violating some kind of anti-money laundering or Bank Secrecy Act (BSA) laws.
Now what
Silvergate is a cryptowide issue because there are only so many banking partners that help facilitate crypto-related U.S. dollar transactions. The fewer of these banks or partners there are, the harder it could be for investors to transfer crypto to dollars and vice versa.
However, through the FTX bankruptcy and now Silvergate news, Bitcoin and the rest of the crypto universe have held up much better than anticipated.
While I am really only interested in the largest, most established cryptocurrencies like Bitcoin and Ethereum right now, Solana and Cardano do have strong networks that make them somewhat intriguing in a better environment for crypto. I have no interest in Shiba Inu at this time.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Cardano, Coinbase Global, Ethereum, and Solana. The Motley Fool has a disclosure policy.