As bitcoin, ethereum and other cryptocurrencies get increasing attention from investors, Wall Street and its traditional banks continue to adjust to the shift. Catch up on this week’s top stories highlighting the intersection of these old guard and new school areas of finance with this recap compiled by The Fly.
NY DFS ENTERS $100M SETTLEMENT WITH COINBASE: Superintendent of Financial Services Adrienne Harris announced Wednesday that Coinbase (COIN) will pay a $50M penalty to New York State for significant failures in its compliance program that violated the New York Banking Law and the New York State Department of Financial Services’ virtual currency, money transmitter, transaction monitoring, and cybersecurity regulations. These failures made the Coinbase platform vulnerable to serious criminal conduct, including, among other things, examples of fraud, possible money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking. In addition to the penalty, Coinbase has agreed to invest an additional $50M in its compliance function over the next two years to remediate the issues and to enhance its compliance program pursuant to a plan approved by DFS.
Following the announcement, Coinbase CLO Paul Grewal said in a Wednesday blog post, “Earlier today, the NYDFS announced a consent order that outlines the NYDFS’s concerns from that investigation about our 2018-2019 compliance program and the compliance backlogs that grew alongside our company’s growth in 2021. We took NYDFS’s concerns seriously and have taken substantial measures to address these historical shortcomings. Today’s consent order includes a $50M penalty. Coinbase has also committed to $50M in compliance program investments over the next two years. We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space – for ourselves and others. We are always willing to acknowledge where we have fallen short and we welcome opportunities to improve our programs."
On Thursday, Cowen analyst Stephen Glagola downgraded Coinbase to Market Perform from Outperform with a price target of $36, down from $75. There is low visibility per stabilization in retail trading volumes in 2023 following further the December deterioration, Glagola said. In addition, potential SEC enforcement action is elevated post the FTX collapse, with regulatory certainty unlikely until 2024, said the analyst. He noted that Coinbase’s monthly trading volumes have seen a "fairly consistent drawdown" each subsequent month since November 2021. There remains low visibility into either a stabilization or rebound in retail trading volumes over 2023 given the macro backdrop and FTX contagion risks on crypto asset prices, according to Glagola.
SILVERGATE REDUCES HEADCOUNT BY 40%: Silvergate Capital (SI) announced Thursday it is taking several actions to ensure the business is resilient and to manage its expense base going forward, in response to recent industry turmoil and the corresponding impact on Silvergate’s balance sheet. The company is reducing headcount by approximately 200 employees, or 40%. The company estimates aggregate costs associated with this reduction in force of approximately $8M, primarily consisting of severance payments, employee benefits and related costs, and expects to incur the majority of these charges in Q1. Silvergate exited its mortgage warehouse lending product in Q4. As a result, the company will incur a restructuring charge of approximately $4M in Q4, primarily related to severance and employee benefits. Over the coming weeks, the company intends to streamline its product portfolio to reduce complexity. Given the current level of industry uncertainty, the company remains committed to maintaining a highly liquid balance sheet with minimal credit exposure and a strong capital position. Silvergate will take an impairment charge of $196M in Q4 related to developed technology assets purchased from the Diem Group. This charge reflects the company’s belief that the launch of a blockchain-based payment solution by Silvergate is no longer imminent. The company will continue to seek opportunities to realize value from these technology assets.
On Thursday, Wedbush analyst David Chiaverini lowered the firm’s price target on Silvergate Capital to $15 from $25 and keeps an Outperform rating on the shares. The company pre-released select Q4 financial metrics that were worse than expected, marked by digital deposit balances coming in at $3.8B, below Wedbush’s $5B estimate, Chiaverini said. Given the significant level of deposit outflows, Silvergate sold both available for sale and held to maturity securities, resulting in a large loss on sale, said the analyst. He views the update as a "clear-the-decks moment" for estimate revisions and expects Silvergate to run the bank profitably following the recalibration of its expense base. Importantly, Silvergate has minimal credit risk and the main risk that has generated losses has been interest rate risk with its securities portfolio, said Chiaverini. He expects a rotation in Silvergate’s shareholder base to value investors from growth investors as the "crypto winter grinds on."
Meanwhile on Friday, JPMorgan analyst Steven Alexopoulos downgraded Silvergate Capital to Neutral from Overweight with a price target of $14, down from $30. The company’s preliminary Q4 results were "far worse" than expected, Alexopoulos said. While the challenging backdrop for the crypto settlement business was a factor in the worse than expected results, concerns voiced by short-sellers likely also contributed to Silvergate’s customers withdrawing deposits from the platform at a greater than anticipated level, said the analyst. He believes the implications to the company’s business from the significant reduction in client deposits has near- as well as longer-term impacts. Alexopoulos sees upside potential being fairly limited until Silvergate’s earnings power is better understood.
Additionally on Friday, BofA analyst Brandon Berman downgraded Silvergate Capital to Underperform from Neutral with a price target of $8, down from $37, arguing that Silvergate’s preliminary Q4 report created "more questions than answers" and introduced a new overhang on the stock, namely the prospect for negative earnings growth. He has lowered his 2023 and 2024 EPS estimates by 90% and reduced his revenue growth forecast by 50%. Berman added that future regulatory and legislative actions that may impact Silvergate "may not be fully recognized by the market."
CRYPTO TRADING FIRM GENESIS LAYS OFF 30% MORE STAFF: Genesis Global Trading, an institutional digital asset trading firm, laid off another group of workers on Thursday, CoinDesk’s Tracy Wang reported Thursday. The firm cut an additional 30% of staff, leaving 145 employees at the company, after previously eliminating 20% of its staff of 260 in August.
"As we continue to navigate unprecedented industry challenges, Genesis has made the difficult decision to reduce our headcount globally," said a Genesis spokesperson, according to CoinDesk.
FEDERAL REGULATORS WARN ON CRYPTO-ASSET RISKS TO BANKS: Federal bank regulatory agencies – including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – issued a Tuesday statement highlighting key risks for banking organizations associated with crypto-assets and the crypto-asset sector and describing the agencies’ approaches to supervision in this area.
"In particular, the statement describes several key risks associated with crypto-assets and the crypto-asset sector, as demonstrated by the significant volatility and vulnerabilities over the past year. Given these risks, the agencies continue to take a careful and cautious approach related to current and proposed crypto-asset-related activities and exposures at banking organizations. The agencies continue to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that is safe and sound, legally permissible, and in compliance with applicable laws and regulations, including those designed to protect consumers. The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations, and, as warranted, will issue additional statements related to engagement by banking organizations in crypto-asset related activities," the regulators stated.
ARGO BLOCKCHAIN UPGRADED TO NEUTRAL: Roth Capital analyst Darren Aftahi upgraded Argo Blockchain (ARBK) to Neutral from Sell on Wednesday with a price target of $1, up from 25c, despite concerns. The analyst noted the company sold its Helios site to Galaxy (BRPHF) for about $65M in cash but kept its existing 2.36 EH/s on-premises under hosting agreements. Further Argo repaid $85M in debt via cash proceeds with a new $35M machine-backed loan, for a net debt reduction of $41M, Aftahi added. The analyst acknowledged that the company may be in better shape with creditors, but said the tradeoff is its growth remains marginalized, with relative erosion of hash rate share.
CRYPTO STOCK PLAYS: Cryptocurrency revenues have been pointed to as reasons to be bullish on Advanced Micro Devices (AMD) and Nvidia (NVDA) in select research. Ideanomics (IDEX), Riot Blockchain (RIOT), Overstock (OSTK), and SRAX (SRAX) are other stocks that have been touted, or promoted themselves, as a way to play the crypto theme.
PRICE ACTION: As of time of writing, bitcoin rose roughly 1% this week to $16,758 in U.S. dollars, according to TradeBlock.
Published first on TheFly
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