The Downfall of a Crypto-Friendly Bank: Silvergate's Collapse Takes Abra Down With It
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The Downfall of a Crypto-Friendly Bank: Silvergate's Collapse Takes Abra Down With It
Silvergate, a crypto-friendly bank, processed $8.1 billion in withdrawal demands following the FTX collapse, with cryptocurrency-related deposits plunging 68% in Q4.
Navigating Web3 tides with focused insightsOn January 5, according to The Wall Street Journal, crypto-friendly bank Silvergate processed $8.1 billion in deposit withdrawals following the FTX collapse. Cryptocurrency-related deposits plunged 68% quarter-on-quarter in Q4. To meet withdrawal demands, Silvergate liquidated debt holdings on its balance sheet and incurred significant losses at steep discounts.
Silvergate’s stock once surpassed $200 in 2021 when cryptocurrency prices peaked, but now trades around $11—erasing nearly 95% of its market value. The downfall of Silvergate serves as a wake-up call for Web3 investment firms and may negatively impact the development of the crypto banking sector.
R3PO will analyze the implications of this event on the crypto banking sector from three perspectives: the Silvergate incident, the broader crypto banking landscape, and competitor Abra’s case study.
「Part 1」Silvergate Suffers Massive Bank Run Due to FTX Collapse
Originally, Silvergate (SI) was a community retail bank based in California, primarily serving local small businesses. After transforming into a crypto-friendly bank and providing banking settlement services to Coinbase, Gemini, and the now-infamous FTX exchange and trading firm Alameda Research, Silvergate underwent a qualitative transformation and went public on the NYSE in late 2019.
Over the past three months, SI's stock has fallen more than 80%. Investor sentiment reflects concerns over two key factors:
SI may have had credit exposure to FTX/Alameda within its Bitcoin collateralized loan portfolio (approximately $300 million as of September 30, about 27% of tangible common equity);
Due to the market crash, SI would experience massive deposit outflows.
These investor concerns have recently been validated by market developments.
Digital Currency Deposits Drop Nearly 70%
By the end of Q4, total digital currency deposits dropped to $3.8 billion, down 68% sequentially. During the quarter, deposits briefly fell as low as $3.5 billion, with customer bankruptcies causing $150 million in deposit losses for Silvergate.
According to Silvergate’s 8-K filing disclosed on November 16, its digital currency deposit base stood at $9.8 billion, a decrease of $2.2 billion from the average $11.9 billion in digital deposits during Q3 of 2022.
Source: S&P Global
Asset Sales to Cope With Bank Run
To meet withdrawal demands, Silvergate sold $5.2 billion worth of bonds held on its balance sheet during Q4 2022, incurring substantial discounted losses. Since 2013, the $718 million loss from debt sales has already exceeded its cumulative profits, resulting in a direct $718 million deficit.
At the end of Q3, the company still had approximately $427 million in unrealized losses within its HTM investment securities portfolio not yet reflected in book value. According to management statements regarding the period-end balance sheet, the fair value of securities was approximately $5.3 billion (with company cash around $4.6 billion).
Layoffs and Business Contraction
Silvergate announced layoffs affecting 40%, or roughly 200 employees, expecting one-time severance and benefit costs totaling $12 million. It also stated it would scale back operations, shelving plans to develop its own blockchain payment solution using Diem technology acquired for $196 million, citing that the company “is no longer in a hurry to launch a blockchain payment solution under current market conditions.”
R3PO believes Silvergate Bank will continue facing multiple headwinds:
1) Potential further regulatory fines;
2) A weaker future crypto market, tighter crypto regulations, and lower-than-expected deposit growth;
3) Significant uncertainty in the crypto regulatory environment could lead to continued downward pressure on the stock price; SI’s business and development may remain depressed for an extended period.
「Part 2」2023 May Mark the Endgame for Some Unprofitable Crypto Banks
In recent years, while cryptocurrency adoption has gradually increased, banking services tailored to digital assets remain far from widespread. Interest in this space continues to grow as crypto-friendly banks attempt to capture inflows into the digital asset ecosystem. Some institutions are experimenting with using cryptocurrencies or mining equipment as loan collateral.
As of October 2022, around 80 financial institutions regulated by the FDIC expressed interest in crypto-related activities, with about 24 actively participating, aiming to tap into the $1.2 trillion global digital asset market. Crypto-friendly banks stand uniquely at the intersection between fiat and digital currencies, serving broad institutional and retail user bases.
Source: Abra Company Data
Market Segmentation
Within the broader crypto custody and banking industry, there are distinct sub-sectors including custodianship, traditional banking, and CeFi platforms. Each participant offers diverse product suites. Compared to Coinbase’s exchange-centric model, Signature and Silvergate offer only basic deposit/withdrawal functions, whereas CeFi players like Celsius and BlockFi provide complex financial products lacking clear security and compliance oversight. The path forward for crypto banks lies in expanding compliant offerings across functionality and product breadth to generate sustainable revenue.
Source: Abra Company Data
Business Model of Crypto Asset Banks
Bank revenues primarily come from interest income and non-interest income. Non-interest income, such as fees, is not the main revenue driver—the core lies in net interest income. When you deposit cash into a bank account, the bank might pay you 1% interest (interest expense). It then lends that same money at 3%, generating interest income. Net interest income is the spread between these two rates. In competitive markets, creating this spread requires taking on risk—most commonly credit risk (borrowers defaulting) and interest rate risk (market rate fluctuations over time).
In crypto, two additional risks emerge:
Liquidation risk: Loans are over-collateralized, but you must be able to liquidate collateral efficiently to avoid losses;
Protocol risk: Blockchains run on code, which can be exploited, leading to losses.
The banks we’re analyzing today operate as full-reserve institutions and do not assume these risks.
In traditional finance, differences in bank deposits are minimal due to regulations like Basel III, which define liquidity requirements (LCR) and high-quality liquid assets (HQLA), creating homogeneity.
As observed, every bank aims to increase deposit volume to profit from the spread between funding costs and investment yields, plus ancillary fees. R3PO believes crypto banks follow similar principles: profitability stems from the deposit-lend-invest cycle, generating both net interest income and fee-based revenue. Key revenue drivers include:
Transaction fees tied to overall crypto market size and trading volume,
Account fees from attracting crypto deposits,
Interest income from crypto-backed lending,
Fees from facilitating flows into DeFi and NFT gateways,
Credit card interest and interchange rebates from issuers and merchants,
Management and performance fees from proprietary asset management activities.
R3PO believes that for crypto banks, success hinges on managing their balance sheets effectively—meeting solvency and liquidity constraints while optimizing the spread between funding and investment rates. The winner will become a trillion-dollar company.
However, as the total crypto market cap declined from nearly $3 trillion in November 2021 to below $1 trillion today, investor confidence in the sector has weakened, significantly impacting the operations of crypto banking participants.
Provident Bancorp Inc. delayed filing its Q3 10-Q report due to assessing actual losses from distressed crypto miners.
Metropolitan Bank saw a $485.9 million drop in crypto-related deposits in Q3 2022, about 70% of which came from Voyager Digital Ltd.
Signature Bank reported $24.67 billion in digital asset-related client deposits as of Q3 2022, stating it would reduce crypto-linked deposits to $8–10 billion by Q1 2023.
Silvergate Bank had $11.9 billion in digital asset deposits in Q3 2022, but recent Q4 data shows this dropped to $3.8 billion—a 68% sequential decline.
R3PO believes that as leading players in the crypto banking sector scale back, some unprofitable crypto banks may face dual crises in revenue generation and fundraising—or even reach their endgame—in 2023.
「Part 3」Abra Bleeds Through Bear Market
R3PO has learned that Abra, a prominent player in the crypto banking space, just completed a $22.6 million bond financing round in December 2022 and simultaneously disclosed ongoing layoffs and business restructuring. According to media reports citing three insiders, crypto investment management firm Abra is reorganizing several business lines and considering cost-cutting measures as part of bear market contingency planning.
Founded in 2014, Abra operates globally, offering financial services including crypto trading, custody, investing, yield generation, lending, payments, and credit cards to both institutions and individuals. Benefiting from the rapid expansion of the crypto market in 2021, Abra experienced explosive growth. In September 2022, Abra announced plans to launch Abra Bank, targeting full regulatory approval and a U.S. banking license by January 2023, enabling American citizens to use digital assets for banking similarly to traditional finance. The bank intends to establish branches across U.S. states, becoming the first regulated crypto bank in the U.S., followed by a global initiative—Abra International—to serve international clients.
Abra 2022 Key Summary:
Partnered with American Express as issuing bank to offer a crypto credit card with 2.5% cashback.
Focuses on institutional crypto users, addressing industry pain points to smooth out cyclical volatility.
Suffered severe losses in 2022, putting the company under significant survival pressure.
Expected to obtain full-regulatory U.S. banking license in January 2023.
Abra’s business metrics from 2020–2021 were impressive, particularly its international expansion strategy through Abra International, targeting overseas markets such as Canada, the EU, and Japan.
Source: Abra Company Data
Abra 2023 Roadmap Highlights:
DeFi/NFT: Provide institutional and individual access to DeFi applications and protocols, along with NFT custody services.
Cash Management: Enable real-time conversion between crypto assets and fiat for daily spending.
Credit Card: Offer a 2.5% cashback crypto credit card in partnership with American Express.
US Bank License: Wyoming SPDI bank charter; Ex-US: Bermuda DABA license.
However, H1 2022 data raises concerns: despite operating in the high-retention banking sector, Abra’s user retention rate after six months dropped below 50%. Even accounting for macroeconomic headwinds, this metric has considerable room for improvement. Monthly average transaction values also declined by 90% MoM in February-March this year, potentially remaining subdued throughout the 2022–2023 crypto downturn.
Abra’s financial condition is concerning
Abra has a high debt-to-asset ratio. Its parent company Plutus Financial held $533M in assets in H1 2022, of which $496M were stablecoins and various cryptocurrencies, with liabilities totaling $525M.
Abra faces challenges in reducing expenses, cutting costs, minimizing losses, and improving margins. Plutus Financial’s H1 2022 P&L shows declining revenues and rapidly expanding losses—$23M in total revenue but a $42M loss, with negative gross margins in March and June.
Based on April–June loss figures, Abra faced cash flow issues in H2 2022. The company had $12M in cash on hand in H1, but cash flow was -$26M. The recent December debt financing disclosure corroborates this situation. It remains unclear how long $22.6 million will last, though timely layoffs and business adjustments represent partial mitigation efforts.
Funding and Valuation
In December 2022, Abra raised $22.69 million via bond financing. Current valuation is unknown, possibly flat or downgraded.
In September 2021, Abra secured $55 million in funding led by Ignia and Blockchain Capital, with other investors including Kingsway Capital, AmEx Ventures, and CMT Digital Ventures. Based on prior round size and cap table changes, this round likely represented ~22% ownership, implying a post-money valuation estimate of $250–300 million.
R3PO’s Outlook on Abra
Abra demonstrated outstanding performance from 2020–2021, with strong growth potential, rich product suite, and solid product capabilities. With expected regulatory banking licenses and the Amex credit card launch in 2023, Abra is well-positioned to maintain moderate growth during the bear market and attract mainstream users.
Abra’s financial models and historical valuations were built on optimistic macro assumptions about the crypto market. However, the current downturn severely impacts user acquisition and retention. Low trading volumes reduce revenue and profits, while poor market returns diminish the appeal and yield expectations of Abra’s asset management products.
Conclusion
As 2023 unfolds, whether Abra can deliver on its business roadmap and licensing plans will determine its future customer growth and fundraising prospects. The revival of the crypto banking sector depends directly on the health of the broader crypto market. Under increasingly strict regulations, crypto banks are drifting further from blockchain purism and moving toward greater regulatory compliance.
R3PO believes only a crypto market with robust asset safety policies can attract traditional capital. Competition among crypto banks for regulatory licenses continues to intensify, but international expansion will become harder due to the difficulty of securing local approvals. Going forward, entry barriers in the U.S. crypto banking market will rise, pushing smaller players toward more conservative regional markets.
Sustained high-growth recovery will test each crypto bank’s technological strength, completeness of blockchain payment network infrastructure, and comprehensiveness of product offerings. R3PO will publish further analysis on crypto credit cards and banking licenses in upcoming articles.
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