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Stakeholders in the Crypto Ecosystem Want US Regulator to Increase Bank's Crypto Capabilities

Following the call for comments made by the Office of the Comptroller of the Currency (OCC) on potential rules regarding cryptocurrencies, stakeholders in the cryptosphere have written to the regulator to increase US bank’s crypto capabilities. As it stands, several government agencies in the United States are going bullish for blockchain and cryptocurrency-related advances.

From the new regulatory framework released by the Commodity Futures Trading Commission (CFTC) to the possibility of paying for legal services with digital currencies, the US is sure gearing for massive new digital integration across all sectors.

The OCC Proposed Regulatory Reform

As the body tasked with the regulation of Federal Banks and financial institutions, the OCC seeks to drive innovations via updated regulations. Recent among these moves is the approval the body granted US banks to keep custody of digital assets.

“National banks and federal savings associations (banks) must have a regulatory and supervisory framework that enables banks to adapt to rapidly changing trends and technology developments in the financial marketplace to meet customers’ evolving needs while continuing to operate in a safe and sound manner.” The OCC said in a statement

The OCC has exercised its role by creating regulations governing data handling, the promotion, and adoption of emerging technologies in the financial service ecosystem amongst other roles.

Owing to the disruptive push by digital currencies, the OCC now believes there is a need for a review for which it is calling stakeholders to make probable inputs.

Notable Comments from Stakeholders

As a veteran investor in the crypto-lending ecosystem, Silvergate Bank told the OCC to encourage the adoption of blockchain channels in sending money among institutions and customers alike. The firm noted:

“Blockchain technology delivers a recognized use case as a transfer of value network, and while many continue to explore how to expand upon that use case, as demonstrated by various USD backed stablecoin projects, they are doing so within existing regulatory frameworks that do not provide adequate guidance for regulated entities, like financial institutions.”

The OCC call has seen about 23 constructive comments trickle in thus far. It is obvious that the growing call for regulatory adherence relating to blockchain and cryptocurrency will go global in due time and in favor of the imminent global digital economy

Morgan Stanley Sees Crypto-Focused Bank Silvergate Shares Gain Up To 52% Rise on Positive Business Update

While several financial institutions are wary of Bitcoin and other cryptocurrencies, Morgan Stanley, the fourth largest investment bank globally, has actively been eying investment in crypto assets.

In a research note on Monday, September 27, Morgan Stanley recommended the stocks in Silvergate, which provides commercial banking and lending services to cryptocurrency companies.

As a result, shares of crypto-focused bank Silvergate Capital Corp increased about 6.5% on Monday after Morgan Stanley initiated coverage of the stock with an overweight rating and a $158 price target.

Morgan Stanley analyst Ken Zerbe believes that Silvergate (NYSE: SI) stock is extremely undervalued at its current trading price of $109. He thinks that SI stocks would be at a $158 trading price, indicating a 52% upside from the current price, with a potential for $300.

“We see a 3:1 bull: bear skew, but recognize that SI has the widest risk-reward of any bank we cover as its growth is tied directly to the health and growth of the cryptocurrency industry,” Zerbe highlighted in the note.

In the research note, Zerbe stated that he believes that Silvergate should be valued based on its earnings growth rather than on comparison to slower-growing banks and traditional banks, particularly given its minimal credit risk. The analyst mentioned that Silvergate has witnessed an increase of its earning asset balances by 434% over the last year to $121 billion, with nearly all of the growth coming from increasing the deposits balances of its cryptocurrency customers.

Zerbe noted that Silvergate is one of the only banks that provide “payment solutions” to the cryptocurrency market, giving SI’s investors “a nearly pure-play way to participate in the rapid growth of the nascent cryptocurrency industry,” he stated.

The company highlighted several use-cases in Silvergate’s favour. The analyst pointed out that the firm’s Silvergate Exchange network allows customers to deposit funds with the bank and transfer in and out of cryptocurrencies. Although Silvergate does not pay depositors interest, Morgan Stanley sees this as positive as Silvergate can still offer recommended crypto interest rates that could avoid the scrutiny from securities regulators that has greeted high-interest leaders like Celsius and BlockFi and Coinbase with hurdles in the recent past.

Silvergate provides loans backed by Bitcoin, and the bank did so over the previous year without posting losses or liquidating customers’ positions. Morgan Stanley thinks that loan demand will grow, which is a good thing.

Zerbe expects Silvergate to see 37% annual EPS growth through 2025 and could rise even more with the introduction of new lending or fee-based products.

The analyst also expects Silvergate’s earnings assets balances to grow 48% over the next 12 months,” with minimal credit risk as loans held for investment is just 6% of earnings assets”.

However, Zerbe recognized that there are big risks and potential regulation around the crypto market is perhaps the most significant, yet unknowable, risk facing Silvergate. The analyst also stated that increased competition might offer an alternative to the Silvergate Exchange Network, which could “materially” slow deposit and fee income growth and limit the number of new clients.

Silvergate announced in July that the bank accepted a whopping $4.3 billion in new deposits from new and existing cryptocurrency customers in the second quarter.

Wall Street Expand Reach to Crypto

While few banks are willing to touch cryptocurrency firms, Silvergate has made its name offering fiat banking services for cryptocurrency businesses.

Last year, Silvergate bank reaped a big reward for some of the risks it took by being one of the first banks to allow cryptocurrency firms to open bank accounts. The bank recently disclosed that it accepted $586 million in cryptocurrency deposits in Q3 2020, bringing its total crypto asset to $2.1 billion as of September 30, 2020, compared to $1.5 billion as of June 20, 2020.

Silvergate also stands to gain massive benefit from its relationship with Facebook’s Diem project. In May, the Diem Association announced that Silvergate would be the sole issuer of its stablecoins.

What appears interesting is that Silvergate is paving the way for other banks to do something that previously has been a no-going zone to them.

Since the beginning of this year, Wall Street interest in bitcoin rose with major banks such as JPMorgan, Morgan Stanley, Mastercard, BNY Mellon, Blackrock and others added impetus by moving to open up access to Bitcoin.

Silvergate Bank Earns Nearly $60m in Q1, Net Income Hits $24.7m

American Commercial bank Silvergate Capital, a bank focused on digital currencies, reports financial results for the first quarter of 2022.

According to the financial report, the company’s Q1 revenue in 2022 is $59.9 million, a year-on-year increase of 93%, and its net income is as high as $24.7 million, a year-on-year increase of 94%.

The bank focuses on giving fiat credits that are crypto collateralised to corporate customers. This will happen as a Silvergate Exchange Network (SEN), a specially crafted remittance structure for huge customers such as cryptocurrency exchanges.

During the first quarter, the company facilitated transactions between cryptocurrency exchanges and financial institutions worth as much as $142 billion.

However, due to the ongoing downturn in the cryptocurrency market, SEN transfers were down from $167 billion in the first quarter of 2021. Bitcoin (BTC) and Ethereum (ETH) spot volumes were down 33% year-over-year.

Silvergate has emerged to be a reckoning force in the cryptocurrency sphere. It offers services to reputable global cryptocurrency firms such as Coinbase, Xapo, Bitstamp, and Genesis Trading.

Rebecca Rettig, a general counsel for Aave Companies, the team behind the decentralised finance (DeFi) platform Aave, is assuming a new role at Silvergate bank, a leading bank for innovative businesses in fintech and cryptocurrency.

Silvergate bank acquired the cryptocurrency technology backbone of Facebook’s Diem Association to keep the prospect alive.

Silvergate wants to leverage the technology with its own crypto expertise to launch a stablecoin digital currency later this year.

The stablecoin could serve as a cryptocurrency alternative to Mastercard and Visa with streamlined international remittances and lower transaction fees.

Silvergate Loses Additional Ratings From Moody's

Things at Silvergate Bank seem to be going from bad to worse after receiving a downgrade to its rating from Moody’s and having ARK Invest give up part of its shares in the bank. The bank has already been attacked by customers in a run, and its demise has been connected to that of FTX.

Cathy Wood’s investment vehicle, ARK Invest, reportedly sold more than 400,000 shares of its parent company, Silvergate Capital, on January 6, for a total value of $4.3 million. After the transaction, ARK Invest was left with just 4,000 shares of the company’s stock. This information comes from a number of stories that were published in the media.

During the course of the previous day, the value of those shares saw a decrease that was equivalent to 43 percent.

Moody’s Investors Service has also taken action in reaction to the problem at the bank, downgrading its ratings of both Silvergate Capital and the bank as a result of the situation.

Both the long-term deposit rating of the bank and the long-term issuer rating of the bank were downgraded, with a negative outlook for both entities. The long-term deposit rating of the bank was downgraded from Baa2 (“lower-medium grade”) to Ba1 (“junk”), and the long-term issuer rating of the bank was also downgraded from Ba2 (“junk”) to B1 (“junk”).

The key elements that lead Moody’s to reach their judgment were the decline in deposits, the losses that were suffered by selling securities to fulfill liquidity needs, and the layoffs that occurred.

As a consequence of liquidating debt in order to return $8.1 billion in withdrawals, Silvergate Bank reportedly sustained a loss of $718 million on January 5th, according to sources. This loss was due to the fact that the bank had to pay back the money.

In addition to that, they terminated the employment of around two hundred workers, which is equivalent to forty percent of their whole workforce.

FTX investors have complained about the same issues in a class-action complaint against Lane, the bank, and Silvergate Capital, which was filed on December 16th.

Silvergate Faces Another Securities Law Class-Action Suit

On January 10, a class-action lawsuit was brought against Silvergate Capital, which is the parent corporation of Silvergate Bank and the operator of the Silvergate Exchange Network. The lawsuit was filed in the United States District Court for the Southern District of California.

Claiming that Silvergate violated the Securities Exchange Act of 1934, the lawsuit was brought on behalf of all buyers of Silvergate securities between November 9, 2021 and January 5, 2023. The litigation was filed on January 5, 2023.

In the lawsuit, defendants included not just the chief executive officer of Silvergate, Alan Lane, but also the chief financial officer, Antonio Martino.

The plaintiff in the lawsuit said that Silvergate’s technology failed to identify instances of money laundering in sums more than $425 million, which resulted in the firm being in a position where it was likely to suffer penalties from regulatory agencies.

In addition, the defendants were aware that the public papers and statements that had been produced or distributed in the name of the Company included materially inaccurate information and/or were deceptive.

A tweet sent by Marcus Aurelius Research on November 15 serves as the basis for the allegation that the corporation was complicit in the movement of $425 million to money launderers in South America.

A large drop in the price of Silvergate shares may have been caused, at least in part, by that tweet as well as the publication of the Bear Cave newsletter dated November 17 that referenced the same problem.

The share price fell even more when it was disclosed in a press statement issued by Silvergate that the bank’s digital asset deposits had plummeted by 68 percent in the last quarter of 2022, going from $11.9 billion to $3.8 billion.

The lawsuit contends that the class members might comprise at least hundreds or thousands of individuals, but their names have not yet been discovered. Silvergate shares are listed on the New York Stock Exchange. In recent months, Silvergate has been subjected to an increasing amount of pressure.

On December 14, a class-action lawsuit was filed against Silvergate for its claimed part in the transfer of monies from FTX user accounts to Alameda Research.

Kraken Halts ACH Deposits and Withdrawals via Silvergate

In a move that has disrupted the cryptocurrency industry, Kraken, one of the world’s largest cryptocurrency exchanges, has announced that it will no longer support ACH deposits and withdrawals via Silvergate, citing difficulties with the automated clearing house. According to reports, Kraken sent an email notice to its users on March 22, notifying them that ACH deposits and withdrawals would no longer be available from March 27.

Kraken has assured its users that no other services would be affected by this change, including ACH instant purchases via Online Banking. The exchange has also advised its users to use alternative funding options, such as MVB Bank for Fedwire deposits and withdrawals, and other instant purchase options, to ensure an uninterrupted funding experience.

Kraken has joined the growing list of cryptocurrency exchanges that have halted their ACH deposits and withdrawals via Silvergate. The Winklevoss brothers-founded exchange, Gemini, also stopped accepting customer deposits and processing withdrawals through Silvergate ACH and wire transfers on March 2.

Silvergate is one of the crypto-friendly U.S. banks that collapsed in early March, alongside other lenders like Silicon Valley Bank, posing major challenges for the cryptocurrency industry. Many cryptocurrency firms hold significant exposure to these banks, which has led to disruptions in the cryptocurrency market.

Kraken joined the Silvergate Exchange Network in 2019, which allowed the exchange to offer deposits and withdrawals in U.S. dollars from Silvergate accounts. Kraken has assured its users that its team is working to make ACH funding available again as soon as possible.

Kraken is a cryptocurrency exchange founded in 2011 by Jesse Powell, who is currently the CEO. The exchange is based in San Francisco, California, and is one of the largest cryptocurrency exchanges in the world, trading over $1 billion daily, according to data from CoinGecko.

Silvergate is a U.S.-based bank that is known for its cryptocurrency-friendly policies. The bank is based in La Jolla, California, and was founded in 1988. In 2019, Silvergate launched the Silvergate Exchange Network, which allows cryptocurrency exchanges to offer deposits and withdrawals in U.S. dollars from Silvergate accounts.

Automated clearing house (ACH) is an electronic funds transfer system that allows businesses and consumers to send and receive payments electronically. ACH transfers are commonly used for direct deposit, payroll, and bill payments. ACH transfers are typically slower than wire transfers but are more cost-effective.

The cryptocurrency industry has faced significant challenges in recent years due to the lack of regulatory clarity and the volatile nature of cryptocurrencies. The industry has also faced challenges with banking relationships, as many traditional banks are hesitant to work with cryptocurrency firms due to concerns over money laundering and fraud. As a result, many cryptocurrency firms have turned to banks like Silvergate, which have more favorable policies towards cryptocurrencies.

MicroStrategy Acquires More Bitcoin Amid Market Recovery

Business intelligence firm and major Bitcoin investor, MicroStrategy, has announced that it is acquiring more Bitcoin amid the recent cryptocurrency market recovery. According to a recent form 8-K filing with the United States Securities and Exchange Commission, MicroStrategy repaid its $205 million loan to Silvergate at a 22% discount and acquired 6,455 Bitcoin for $150 million. The latest purchase brings the total amount of BTC held by the company to 138,955, which was bought for $4.1 billion at an average price of $29,817 per coin.

The company acquired its latest batch of Bitcoin between Feb. 16, 2023 and March 23, 2023. The purchase marks MicroStrategy’s first Bitcoin acquisition of 2023, with the previous purchase taking place in late December 2022, when the company bought 2,395 BTC for $42.8 million at an average price of $17,181 per coin during the period from Nov. 1 to Dec. 21.

In addition to the BTC purchase, MicroStrategy sold class A common stock worth $500 million. According to the latest updates, the company issued and sold an aggregate of 1,348,855 shares under the sales agreement for aggregate net proceeds of approximately $339 million.

As previously announced, MicroStrategy’s subsidiary, MacroStrategy, received a $205 million term loan from Silvergate Bank in March 2022 under its Silvergate Exchange Network Leverage program. The loan was collateralized by certain Bitcoin owned by MacroStrategy and had a scheduled maturity date of March 23, 2025. Under the terms of the credit agreement, MacroStrategy was required to maintain a loan to collateral value ratio of less than 50%.

On March 24, 2023, MacroStrategy and Silvergate entered into a prepayment, waiver, and payoff to credit and security agreement, with MacroStrategy voluntarily prepaying Silvergate around $161 million in full repayment. According to the filing, “Upon Silvergate’s receipt of the payoff amount, the credit agreement was terminated, and Silvergate released its security interest in all of MacroStrategy’s assets collateralizing the loan, including the Bitcoin that was serving as collateral.”

MicroStrategy’s co-founder and former CEO, Michael Saylor, took to Twitter to announce the loan repayment and Bitcoin acquisition. The company’s ongoing acquisition of Bitcoin has made it one of the largest institutional holders of the cryptocurrency.