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Silvergate: Crypto’s Role in a Banking Collapse

How the alleged fraud at FTX led to Silvergate’s decision to liquidate

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  • Written by  Banking Exchange staff
Silvergate: Crypto’s Role in a Banking Collapse

Embattled Californian bank Silvergate is to close its doors permanently after a wave of customer exits and a collapse in its share price.

The bank’s holding company, Silvergate Capital Corporation, announced its plan to “wind down operations and voluntarily liquidate” in a statement on March 8.

The development comes after months of turmoil in crypto-asset markets, with multiple events hitting the bank’s operations and forcing Silvergate to lay off staff and close down some services.

The fall of a crypto giant

At the end of 2021, Silvergate’s deposit base had increased to $14.3 billion, up from just $5.2 billion 12 months previously.

The bank provided depository services to a range of crypto-related companies and supported innovation in the sector through its Silvergate Exchange Network, including providing loans collateralized using bitcoin.

But the collapse of FTX amid fraud allegations in November proved the catalyst for Silvergate’s decline, with confidence rapidly falling and multiple clients reassessing their relationships with the bank. In addition, several US politicians laid the blame for its struggles firmly on the crypto sector.

Marcus Sotiriou, market analyst at digital asset broker GlobalBlock, argued that the Silvergate situation was “not a crypto problem”.

“Silvergate’s collapse was due to $13.3 billion of demand deposits, that depositors could withdraw in minutes, supported by only $1.4 billion of cash,” Sotiriou said. “As opposed to being a crypto-related problem, it was clearly due to Silvergate not having enough cash leading to the lack of capital from the bank run.”

He added that a letter from Senator Elizabeth Warren to Silvergate CEO Alan Lane, published on January 31, “exacerbated” the banks issues and “undermined public trust in Silvergate, which catalyzed its downfall”.

Total deposits collapsed from $13.2 billion at the end of September 2022 to less than $6.3 billion just three months later. The company’s fourth quarter financial results revealed a net loss of more than $1 billion.

Since the start of the year, the company has revealed depository relationships with Genesis and BlockFi, both of which have filed for bankruptcy. It announced job cuts and ceased dividend payments to shareholders at the end of January.

Earlier this month, several crypto-related companies paused or ceased their relationships with Silvergate, prompting the company to delay filing its annual report as it assessed its “ability to continue as a going concern”. The bank has since discontinued the Silvergate Exchange Network, and last week announced its decision to wind up.

Silvergate statement

Silvergate’s liquidation statement read: “In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of bank operations and a voluntary liquidation of the Bank is the best path forward.

“The bank’s wind down and liquidation plan includes full repayment of all deposits. The company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”

“All other deposit-related services remain operational as the company works through the wind down process. Customers will be notified should there be any further changes.”

Clothilde Hewlett, commissioner at the California Department of Financial Protection and Innovation, said in a statement that the state regulator was “monitoring the situation closely to facilitate the safe and expeditious voluntary liquidation of Silvergate Bank”.

“The department is evaluating compliance with all financial laws, as well as safety and soundness obligations, and is working closely with relevant federal counterparts,” Hewlett added.

As the winding up process begins, Centerview Partners has been appointed financial advisor to Silvergate, with law firm Cravath, Swaine & Moore acting as legal advisor. Strategic Risk Associates is providing “transition project management assistance”, according to the bank’s statement.

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