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Silvergate Becomes Takeover Bait As Crypto Bank’s Depositors Flee

Silvergate Capital’s plunging stock price is threatening the crypto-friendly bank’s independence after the company revealed more than two-thirds of its deposits were withdrawn in Q4.

Citing “a transformational shift” in the cryptocurrency industry that led to multiple bankruptcies last year, Silvergate provided preliminary results for the final quarter that showed its deposits from digital-assets customers–the bulk of its business–shrank to $3.8 billion at year-end from $11.9 billion on September 30.

The bank was quick to point out that it held cash and equivalents of $4.6 billion on December 31, allowing it to more than meet withdrawals from all of its crypto-related customers. But the shrinkage of a business that held $14.1 billion of digital-currency-sector assets at the start of last year and a stock-market capitalization that has fallen to $398 million from $4.5 billion since that time, put its continued existence as a standalone company in doubt. The shares lost 43% of their value on Thursday, sliding to $9.40.

Speaking on a conference call to explain its release of the Q4 metrics, executives raised the possibility that Silvergate might find itself a takeover target, Yahoo reported, based on its bargain price. Such a transaction might get a push from federal regulators, such as the Office of the Comptroller of the Currency (OCC).

“Someone’s going to have to come to Silvergate with the examiners and figure out something by Monday because it’s getting a little out of hand and this is a licensed entity,” says Paul Schulte, founder and editor of Hong Kong-based Schulte Research, which provides information on banks and financial technologies. “I’m gonna bet you that the OCC is going to be in Silvergate offices over the weekend. They’re going to have to do a bank cleanup, figure out who’s at risk, how much is at stake here, who is on the hook, and who is potentially going to lose. Can they make something happen before they open up on Monday to keep this from spreading?”

He compared the situation to the 2008 rescues of Washington Mutual and Wachovia, which became destabilized by the U.S. housing crisis and were absorbed by larger rivals.

Silvergate has not immediately responded to Forbes’ request for comment.

The company’s problems stem from the almost year-long decline in the cryptocurrency markets, which has led many of its clients to pull back from digital assets. To fund the wave of withdrawals, which coincided with the unraveling of high-profile client FTX, Silvergate sold $5.2 billion worth of debt securities at a $718 million loss and said it would lay off 40% of its staff (about 200 people).

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Despite the crypto upheaval, the Silvergate Exchange Network, the bank’s real-time payments platform, continued to operate with an average daily trade volume of $1.3 billion in Q4, rising from $1.2 billion in the previous quarter.

The bank announced that it had shelved plans to launch its own stablecoin. It recorded a $196 million loss related to its write-off of the assets of Diem, a stablecoin project founded by Meta, which Silvergate acquired last year.

The report did not include details of Silvergate’s balance sheet or income statement; the company is set to publish its quarterly and annual earnings report on January 17. The company rode the crypto boom to great heights, with its stock gaining more than 1,700% from its $12 per share 2019 initial public offering to the late 2021 peak of $220.

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