Major banks see profits from crypto leftover, but FTX is a threat

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As major banks and financial institutions steered away from what Jamie Dimon called a “decentralized Ponzi scheme,” the gap was filled by small lenders who saw profit in helping service companies that include but are not limited to, Silvergate Capital Corp., Provident Bancorp Inc., Metropolitan Commercial Bank, Signature Bank and Customers Bancorp Inc. The latest crackdown and collapse of FTX puts them center-stage.

Silvergate goes back with cryptocurrency to when it first began with just Bitcoin. The former's CEO, Alan Lane, saw potential in building products to serve the market's needs: “What I saw,” he said, “was an opportunity to bank these companies that were essentially being de-risked from other banks.”  

Lane set up a payment network that connects dollars and crypto, through his Silvergate Exchange Network (SEN), which offers users the opportunity to transfer around dollars between each in order to settle their crypto transactions any time during the day or night. The network passed $1 trillion in cumulative payment volumes earlier this year, with one customer being the infamous FTX, whose founder, Sam Bankman-Fried, is now disgraced.

"I'm really sorry, again, that we ended up here. Hopefully, things can find a way to recover," Bankman-Fried, nicknamed the 'King of Crypto', wrote on Twitter on Friday. "I was shocked to see things unravel the way they did."

Bankman-Fried was one of the stars in the crypto field, drawing comparisons to investment magnate Warren Buffett. His net worth used to be over $15 billion. 

Bankman-Fried tried to organize a bailout but failed - this left FTX struggling to raise billions of dollars and many customers unable to retain their money.

The win for Silvergate was that most of its profits were from deposits left by digital customers on its network, which amounted to 90% of the bank’s overall deposit base, almost $11.9 billion. They were later reinvested in securities to earn the $11.4 billion securities portfolio, which generated 2.2% over the three months to September.  

Read next: Brazil awaits approval of new Crypto bill

Left holding the bucket

With FTX now gone as well, according to Silvergate, the company represented less than 10% of deposits from digital asset customers, disclosing that average deposits quarter-to-date plunged down to $9.8 billion. Crypto trading platform FalconX sent an email on Friday to its clients relaying that Silvergate’s SEN and wires won't be used "effective immediately and until further notice.”  

To raise cash, Silvergate will have to resort to its securities portfolio, but rising rates tarnished its value since the bank was already facing $1 billion of unrealized losses at the end of September and a chunk of the portfolio, amounting to $3.1 billion, is in a held-to-maturity sleeve - which accounting prohibit it from touching.

Silvergate’s market value has gone back down to below $1 billion after hitting above $4 billion in a peak from about $200 million in 2020.

'Old banking is boring'

Provident, one of the oldest banks in the US, founded in 1828, became owned by shareholders after it became a stock-holding company, transforming itself into a highly capitalized institution as new shares rolled in with the conversion.

Curious as to how it could invest its excess capital, crypto was the answer, after starting with deposit and cash management services for digital currency, and then it moved onto lending, which Provident supported.

The bank filled its crypto-related loan book with up to $139 million, equivalent to 58% of its equity capital. However, with the market conditions, the bank hinted that losses may possibly amount to $27.5 million due to hold-ups on $104 million of crypto-mining loans.

The Metropolitan Commercial Bank looked after $1.5 billion of deposits, equivalent to about a quarter of its total, from digital-currency businesses in 2021. Voyager Digital, one of its major clients, filed bankruptcy in July which led the Bank downhill since it needed to return deposits to its end-users.

Deposits from digital currency businesses plunged to half, but some banks deny facing reality and claim their crypto businesses are resilient.

Signature Bank has been playing in the digital-asset-deposits game since 2018, and mirrored Silvergate's payment network by previously offering loans collateralized by certain types of cryptocurrencies that are no longer available in the market.