The Great Crypto Collapse
The Great Crypto Collapse
Provident Bancorp (PVBC), Silvergate Bank (SI), Customers Bancorp (CUBI), New York Community Bancorp (NYCB), Signature Bank (SBNY), and Metropolitan Bank (MCB)
“After nearly 200 years in the business, we want to be more than just your average bank.”
That is the mission statement of Provident Bancorp (NASDAQ: PVBC — $140 million), which was founded in 1828 and is currently the 10th oldest bank in the country. In 2019, Provident largely rebranded as BankProv “a future-ready commercial bank that is transforming the financial landscape” and began aggressively catering to the cryptocurrency industry.
BankProv “partnered with some of the top digital asset companies,” offered loans against Ether and Bitcoin, provided credit to Bitcoin miners, dabbled in renewable energy projects, worked with a Bitcoin ATM company, and does business with 144 digital asset and fintech clients according to its website.
If you read BankProv’s most recent financials you would assume all is going well. The bank has attracted over $100 million in “digital asset customer deposits” and its “loans to digital asset companies” increased from $15 million on December 31, 2020 to $138.6 million on June 30, 2022. Over that same time period, BankProv’s total allowance for loan losses increased only marginally, from $18.5 million to $18.9 million, an indication its loans were performing well.
Not so fast.
Some signs of trouble with BankProv first emerged in November 2021 when its Chief Lending Officer “retired.” BankProv later disclosed “a $984,000 expense relating to an agreement between the Bank and the President and Chief Lending Officer in connection with his retirement.”
Other cracks quickly emerged. One of BankProv’s largest loans was to Stronghold Digital Mining (NASDAQ: SDIG), an “environmentally friendly” Bitcoin miner. It has fallen ~97% since its October 2021 IPO.
Some of BankProv’s partnerships and integrations also appear dubious. One of its new “strategic integrations” is with Republic, which allows “some of the world's most anticipated crypto projects” to crowdsource funds from investors. Some of the projects soliciting investment on Republic’s platform include “Ember Fund,” a crypto app that charges 3-4% of AUM in fees and “Realm Metaverse Real Estate,” which owns “a diversified portfolio of digital assets across 13 metaverses.”
On Tuesday, BankProv announced that it was unable to file its quarterly results and “indicated that it currently estimates that it will report a net loss of approximately $27.5 million for the quarter.” BankProv also said it “is still evaluating the actual level of losses due to the recent decline in the cryptocurrency mining industry… After $27.4 million loan forgiveness, the digital asset mining loan portfolio totaled $76.5 million at September 30, 2022, of which, upon review, the company estimates a majority to be impaired and placed on non-accrual status with significant related specific reserves.”
Fortunately for BankProv’s digital asset depositors, on its page titled “apply for your crypto business account” BankProv highlights,
“All deposits held at BankProv are fully insured by a combination of the Federal Deposit Insurance Corporation (FDIC) and the Depositors Insurance Fund (DIF). No depositor has ever lost a penny with unlimited deposits backed by DIF.”
BankProv’s CEO, David Mansfield, was previously a bank examiner at the FDIC and a capital markets examiner at the Office of the Comptroller of the Currency. His son, Paul Mansfield, is BankProv’s director of specialty lending.
Despite its dedication to the space, BankProv has nowhere near the largest exposure to the cryptocurrency ecosystem. That distinction belongs to a collection of banks serving the multi-billion “stablecoin” market — cryptocurrencies like USDC, Gemini Cash, and Pax Dollar that are tethered to the U.S. dollar and used as a proxy for cash on many crypto exchanges.
Let’s first look at Pax Dollar, a stablecoin with roughly ~$900 million worth of circulation issued by Paxos Trust Company. Of that $900 million, about $700 million is in Treasury debt and “Treasury Collateralized Reverse Repurchase Agreements” according to Pax Dollar’s unaudited October 2022 holdings report. Another $200 million is held in “insured depository institutions” like Silvergate Bank (NYSE: SI — $992 million) and Signature Bank (NASDAQ: SBNY — $8.68 billion). Paxos’s FDIC Pass Through Insurance Disclosures also lists Metropolitan Bank (NYSE: MCB — $774 million) as a bank that maintains its FDIC-insured omnibus deposits.
Paxos discloses, “Not all deposits are covered by the FDIC or private insurance, and Paxos may still incur losses in the event of a bank insolvency.” Sheila Bair, the former chair of the FDIC from 2006 to 2011 is on the board of Paxos.
More alarming, an August 2022 forfeiture application for probable cause filed in Broward County alleges Paxos and Silvergate were connected to a money laundering operation. The filing was first highlighted by Marcus Aurelius Research, and it reads in part,
“In June 2022, your Affiant subpoenaed bank account records for multiple digital cryptocurrency trading platforms held at Silvergate Bank. The records for those accounts held in the name of… Paxos Global PTE LTD, and Paxos Trust Company. In these records were the wire transfer payment details from the various operating accounts which represented the funds being transferred off the respective cryptocurrency platforms and into the US financial system.”
The filing continued,
“Records produced by Silvergate Bank found: (i) During the period of September 2021 to June 2022 ten companies had transferred a total of over $425 million dollars off these cryptocurrency trading platforms into accounts held at different US banks. (ii) The accounts were receiving funds in the same pattern as those… used to facilitate the laundering of illicit funds.”
