Several major traditional banks with varying degrees of crypto exposure now find themselves unsure of their next move in the wake of the FTX collapse.
Most banks are suffering a reduction in deposits or loan defaults from companies that used crypto to collateralize loans.
Silvergate’s crypto deposits down to $9.9 billion
Multiple digital asset businesses, including the recently collapsed FTX exchange, Coinbase, Kraken, and Circle Internet Financial, used the Silvergate Exchange Network, a real-time payments system, to transfer dollars between themselves, and have the transactions settled in fiat at any time of the day.
Silvergate Capital Corporation is the is the parent company of Silvergate Bank. Silvergate Bank is regulated bank interested in the stability of the U.S. dollar, the bank’s CEO Alan Lane said on the Bloomberg Odd Lots podcast. It is a member of the Federal Reserve, has a California state banking charter, and all of its deposits are insured by the Federal Deposit Insurance Corporation.
Silvergate Bank CEO Alan Lane spotted a niche market to address the disconnect between the 24/7 nature of crypto and the operating hours of traditional banks. The bank started opening accounts for businesses involved in Bitcoin in 2014.
Unfortunately for Lane and Silvergate, the collapse of FTX resulted in the loss of just under 10% of the bank’s deposits. Crypto deposits are also down to $9.9 billion this quarter to date. According to Bloomberg, other clients have also been pulling out. This will require Silvergate to reach into its $11.4 billion portfolio of securities to honor withdrawal requests.
Silvergate rival Signature Bank claims ‘stable’ balance sheet
Another publicly-traded bank, Provident Bancorp Inc., used cash raised from its conversion to a stock company to create a crypto deposit and cash-management products for its clients in 2020. It also offered crypto-collateralized loans, which are now under pressure as borrowers are hit by the deepening crypto winter.
Metropolitan Commercial Bank, which counted collapsed crypto brokerage Voyager Digital as a client, had to return money to Voyager Digital’s end users after Voyager Digital filed for bankruptcy in July 2022. In Sep. 2022, digital asset businesses had reduced their deposits into Metropolitan Commercial Bank by 50%.
New-York-based Signature Bank, which offered a similar payments service as Silvergate, helds $23.5 billion in digital asset deposits in Sep. 2022, of which roughly $12 billion came from crypto exchanges, including FTX. Crypto-related deposits made up a quarter of their deposits. It said in a recent press release that its balances were stable.
“Signature Bank is a well-diversified institution that employs appropriate risk management strategies that help us navigate the current challenging digital asset landscape. Our strong capital, solid earnings, and overall diversification continues to provide a source of strength for our depositor clients,” stated CEO Joseph J. DePaolo on Nov. 15, 2022, press release.
Mining losses put pressure on loans
While many of these banks looked to cash in on the booming crypto industry that peaked in 2021 to provide a gateway into the world of traditional finance, they now face lingering questions about how they will reorganize their business priorities after the collapse of FTX. Provident Bancorp delayed its third-quarter earnings release. It is expected to post over $25 million in losses related to loans to crypto miners.
As previously reported, Bitcoin miners are experiencing a rising cost floor for producing BTC. This is accompanied by a spike in miner selling pressure in the last three weeks. Iris Energy announced on Nov. 21, 2022, that it was retiring 3.6 EH/s of mining power as part of a loan default.
Some banks have had a love-hate relationship with the sector, including Wall Street titan JPMorgan Chase. Despite JPMorgan CEO Jamie Dimon’s vehement opposition to crypto, the bank recently conducted its first DeFi trade. The trade used a permissioned Aave lending pool. Using smart contracts to perform on-chain Know-Your-Customer checks, the bank exchanged 100,000 Singapore dollars for 10 million Japanese Yen.
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