Written by Manya Saini, Nikit Nishant, and Hannah Lang

(Reuters) – Silvergate Capital Corp. reported a sharp drop in cryptocurrency-related deposits for the fourth quarter on Thursday as investors terrified of the FTX collapse pulled out more than $8 billion in deposits, sending shares down more than 42%.

The cryptocurrency-focused bank also said it would cut its workforce by 40%, or about 200 employees, as it tries to rein in costs amid a growing industry downturn. Its stock was last traded at $12.55.

The terrible initial earnings report shows the impact on the digital asset industry from the collapse of cryptocurrency exchange FTX, which filed for bankruptcy in November after failing to cover customer withdrawals, marking a stunning reversal of the fortunes of what was once one part of the world. The largest cryptocurrency exchange.

Total deposits from Silvergate digital asset customers fell to $3.8 billion at the end of December, compared to $11.9 billion at the end of September. The company sold $5.2 billion worth of debt securities at a loss of $718 million in the fourth quarter to maintain liquidity.

Silvergate had previously said it had no outstanding loans or investments in FTX, but its shares have shed 69% of their value since the stock market crashed, prompting a massive cryptocurrency sell-off.

Plaintiffs have seized US bank accounts at Silvergate and Farmington State Bank of the Bahamas-based FTX subsidiary, known as FTX Digital Markets, a US attorney told a bankruptcy court on Wednesday.

Court records show that accounts at Silvergate Bank and Farmington State Bank, which deals with Moonstone Bank, had about $143 million.

On Tuesday, FTX founder and former CEO Sam Bankman-Fried pleaded not guilty to eight criminal charges including fraud and conspiracy to launder money. The 30-year-old is accused of plundering FTX clients’ deposits to support his Alameda Research hedge fund, buying real estate and donating millions of dollars to political causes.

“We are in a ‘shoot first, ask questions later’ period for any bad news related to cryptocurrency and the crypto-related business,” said Thomas Hayes, Chairman and Managing Director of investment firm Great Hill Capital.

“We expect this carnage to continue for some time as there is no way to value the underlying assets.”

Slowing its business expansion, La Jolla, California-based Silvergate has delayed the launch of a blockchain-based payment solution it bought from Meta Platforms Inc-backed Diem Group last year.

The bank said it would incur a $196 million impairment charge in the fourth quarter on assets purchased for the Payment Solutions project.

Total deposits from Silvergate digital asset customers fell to $3.8 billion at the end of December, compared to $11.9 billion at the end of September. The company sold $5.2 billion worth of debt securities at a loss of $718 million in the fourth quarter to maintain liquidity.

Many US lawmakers have questioned the relationship between crypto companies Silvergate and Bankman-Fried.

In a December letter to Silvergate CEO Alan Lane, Senators Elizabeth Warren, John F. Kennedy and Roger Marshall expressed concern that Silvergate may have facilitated the transfer of FTX clients’ funds to Alameda, and asked for information on the bank’s anti-money laundering compliance program.

On a conference call with analysts Tuesday, Lin said Silvergate “absolutely” follows all the requirements of the Know Your Customer and Bank Secrecy Act, which require banks to report suspicious activity.

“The misinformation out there is very frustrating,” Lin said. “We follow the Bank Secrecy Act, the US Patriot Act for every account we open, and we do constant monitoring.”

Given the headcount reduction, impairment charges and “the future potential for regulatory action as it relates to FTX/Alameda wires, I would imagine Silvergate is certainly exploring strategic options at this point, including a potential merger/sale,” said Ben McMillan, chief investment officer at IDX Digital Assets.

Silvergate declined to comment on whether it would pursue any strategic options.

On Tuesday, US bank regulators issued a joint statement warning banks of risks associated with cryptocurrency, adding that they have concerns about the integrity and integrity of banking business models that are heavily concentrated in cryptocurrencies.

Founded in 1988, Silvergate entered the crypto world in 2013. The bank’s clients include major exchanges such as Coinbase (NASDAQ:) Global Inc and Kraken.

The bank had also operated a mortgage warehouse business, but announced in December that it was winding up that division, citing an environment of increasing interest rates and declining mortgage volume.