Silvergate Bank Shuts Down Exchange Network, Ordered to Release $9.9M to BlockFi

On March 3, Silvergate Bank, a crypto-friendly bank, announced the discontinuation of its Silvergate Exchange Network (SEN), its digital asset payment network.

This move follows a massive stock drop of over 59% in just five days, which triggered concerns about potential bankruptcy. According to a statement on its website, the decision to terminate SEN was “risk-based.”

Coincidentally, on the same day, United States Judge Michael B. Kaplan ordered Silvergate Bank to return $9,850,000 deposited by BlockFi.

The court gave the bank an immediate deadline to release the funds following an agreement between the two companies in November 2022. BlockFi is one of the many crypto firms that suffered from the FTX collapse last year, just like Silvergate.

Silvergate had liquidity issues in the past due to the crypto bear market before experiencing significant outflows in Q4 2022, which led to a net loss of $1 billion.

In an effort to address the surge in withdrawals, Silvergate reportedly borrowed $3.6 billion from the Federal Home Loan Banks System (FHLB), a group of 11 regional banks in the US that provide funds to other lenders and banks.

According to a report published by the US Securities and Exchange Commission (SEC), Silvergate Bank has been experiencing heavy deposit outflows and has taken several steps to maintain cash liquidity, including selling debt securities and wholesale funding. The bank is also facing class-action lawsuits over its relationship with FTX and Alameda Research.

Fears of a potential liquidity crisis and bankruptcy protection intensified when Silvergate delayed filing its annual 10K financial report.

Following this announcement, several crypto firms, including Coinbase, Circle, Bitstamp, Galaxy Digital, and Paxos, scaled back their partnerships with Silvergate in some capacity. Meanwhile, MicroStrategy and Tether publicly denied any significant exposure to the bank.