Silvergate Capital Corp. does not have outstanding loans to BlockFi Inc. on SEN Leverage, a platform the bank uses to underwrite loans using bitcoin as collateral, bank President Ben Reynolds said in a Nov. 28 interview.
Silvergate previously issued a bitcoin-collateralized loan to BlockFi but it was paid off earlier this year, Reynolds told S&P Global Market Intelligence. He declined to elaborate. Cryptocurrency lender BlockFi filed for Chapter 11 bankruptcy protection Nov. 28 following the collapse of its investor FTX Trading Ltd.
Companies taking loans on SEN Leverage are required to set aside more collateral than the amount they borrow so that the borrower has sufficient bitcoin to liquidate for repayments in the event of insolvency. Silvergate uses third-party custodians to oversee the bitcoin collateral, including Coinbase Global Inc. and Fidelity Digital Assets Services LLC, Reynolds said.
"What we found is when firms are looking for liquidity, if they pay off their SEN Leverage loan, they get back more than they had in bitcoin," Reynolds said. This is because the loans are overcollateralized and borrowers can increase their cash position by receiving the collateral that exceeds the amount of loans they pay off.
Failed rescue bid
BlockFi encountered a liquidity crunch in July when its borrower Three Arrows Capital PTE. LTD. went insolvent, triggered by the collapse of stablecoin pair Luna and TerraUSD. FTX's US division at that time provided a capital injection comprised of a $400 million credit facility and the right to acquire BlockFi. But the rescue attempt collapsed as FTX itself filed for bankruptcy in November.
Alameda Research, the hedge fund deeply associated with FTX, defaulted on approximately $680 million of collateralized loan obligations to BlockFi in November, according to BlockFi's Nov. 28 bankruptcy filing.
BlockFi currently has bank accounts for cash management purposes with Silvergate, Signature Bank, BCB Bank of BCB Bancorp Inc., Capital Union Bank Ltd. and Silicon Valley Bank of SVB Financial Group, the filing shows.
Silvergate's shares fell more than 11% on Nov. 28, a larger drop than the other banks doing business with BlockFi. Signature's shares were down by 4.26%, while BCB Bancorp's declined by 3.3% and SVB Financial's dropped by 2.28%.
Limited impact on deposits, payments
On the deposit side, BlockFi accounts for less than $20 million of Silvergate's total deposits from all digital asset customers, according to a Silvergate press release. Silvergate has no investments in BlockFi.
To ensure liquidity in ACH payment services provided to BlockFi, Silvergate maintains a first priority lien and security interest in a cash collateral account, which contains $10 million for the benefit of Silvergate, according to the press release.
"We're constantly evaluating our borrowers, our risk management practices, and I think the fact that we haven't had any losses on these products so far is a testament to our risk management practices," Reynolds said.
In the third quarter, outstanding loan balances on SEN Leverage ranged between $268 million and $322 million, with an average of $308 million, according to an earnings release. It had over 1,600 customers in its digital asset ecosystem as of the third quarter.