Crypto mega bank Silvergate suggests it might not survive, leaving crypto companies scrambling

When the 800-pound gorilla gets sick… A California bank that's played a vital role in the crypto industry's growth issued a stark warning on Wednesday: its days may be numbered. Publicly traded Silvergate said it wouldn’t be able to file its annual report with the SEC on time because its financial position has deteriorated significantly since last month. Now it's "evaluating" whether it can continue operating. The fallout was swift:

• Not so silver-great: The bank's stock plunged nearly 60% yesterday, hitting a record low as anxious investors shed shares.

• Won't silver-wait: Coinbase, Galaxy Digital, and crypto-services biz Paxos all said they're taking their business elsewhere.

Silver lining turns gray… Silvergate was the crypto bank because it was one of the few US banks willing to go all in on crypto, offering companies a bridge between digital assets and dollars. Before that, it was a relatively small community lender with three SoCal branches and less than $1B in assets. Fast forward to last year: Silvergate held $16B in deposits, 90% of which were crypto-related. But things took a turn after FTX's fall (FTX had accounts at the bank). Silvergate reported a $1B loss last quarter, and it’s reportedly facing a Department of Justice fraud investigation.

THE TAKEAWAY

Crypto risks becoming an island… if it loses its banking bridge to the financial mainland. Crypto promises a system separate from traditional finance (aka: TradFi), but it still heavily relies on regulated banking partners to get US dollars in and out of the system. Without partners like Silvergate, crypto's growth path looks narrower. Even Coinbase's substitute for Silvergate, Signature Bank, moved to reduce its crypto exposure last year. That, combined with a recent cautionary note from regulators aimed at crypto-curious banks, could pose a real problem.