The Largest FDIC-Regulated Crypto Bank Just Shut Down: 5 Things To Know

The Largest FDIC-Regulated Crypto Bank Just Shut Down: 5 Things To Know

crypto bank

Silvergate CEO Alan Lane, second from right, rings the New York Stock Exchange opening bell before his bank's IPO begins trading, Nov. 7, 2019. (AP Photo/Richard Drew)

Silvergate, a Federal Reserve member bank and a one-time major player in crypto banking, is shutting down and liquidating, confirming fears that it was headed for bankruptcy after delaying its annual report.

The announcement came shortly after the crypto-friendly bank said it was evaluating its viability following a $1 billion loss in the fourth quarter.

The bank said in a press release that it plans to return all deposits. While the company shut down its Silvergate Exchange Network (SEN) on March 3, 2023, it said all other deposit-related services remain operational.

The bank’s implosion makes it one of the few non-crypto companies to go out of business as a result of the industry’s downturn, Wall Street Journal reported.

U.S. regulators with the Federal Deposit Insurance Corp (FDIC) arrived at the California headquarters of Silvergate Capital Corp. last week to discuss with management ways for the crypto-friendly bank to avoid a shutdown, people familiar with the matter told Bloomberg.

The now-defunct instant payment platform Silvergate Exchange Network operated outside of banking hours for 24/7 transfers between investors and crypto exchanges, unlike traditional bank wires, which can take days to transact. Through its exchange network, Silvergate helped institutional investors move dollars in and out of crypto-trading platforms and linked the bank accounts of investors and exchanges. 

The Biden administration compared Silvergagte to other recent crypto company implosions and President Joe Biden has asked Congress to take action in this area, White House press secretary Karine Jean-Pierre said Monday in a press briefing.

“In recent weeks banking regulators have released guidelines on how banks should protect themselves from risks associated with crypto,” Jean-Pierre said. “As you know, this is a president that has repeatedly called on Congress to take action to protect everyday Americans from the risk posed by digital assets.”

When the FTX crypto exchange — a Silvergate client — declared bankruptcy on Nov. 11, 2022, it caused a run on the bank. Silvergate was forced to sell assets at a heavy loss to cover $8.1 billion in withdrawals. Companies controlled by FTX founder Sam Bankman-Fried accounted for about $1 billion of the bank’s deposits.

Silvergate came under intense scrutiny over its relationship with FTX and Bankman-Fried’s crypto-trading firm, Alameda Research.

Silvergate’s stock tanked in a worst-case scenario, falling 85 percent in the fourth quarter as the FTX collapse impacted the broader financial system. Its crypto-related deposits fell 68 percent in the fourth quarter. A bank run of that size was highly unusual, David Benoit reported for the Wall Street Journal. Silvergate has now lost more than 97 percent of its value since its all-time high at around $220 in November 2021.

Silvergate isn’t structured like most banks, Benoit wrote. It sold off a lot of its traditional banking operations and branches to focus on providing bank accounts to crypto exchanges and investors. Crypto-related deposits accounted for 90 percent of its total, and it kept almost all deposits in cash or easy-to-sell securities. 

At the end of Q4, Silvergate said it had more cash on hand — $4.6 billion — than its $3.8 billion in remaining deposits. It had another $5.6 billion in debt securities such as U.S. Treasurys that could be sold quickly. 

Now regulators are in urgent talks with Silvergate to find ways to save it from a possible shutdown. Regulators could opt to put it in receivership, taking over operations. The FDIC is an independent government agency whose job is to supervise financial institutions for safety, soundness and consumer protection, according to its website.

Silvergate had $1.8 billion in deposits and $2 billion in assets at the end of Q4 2018. By the time crypto peaked in 2021, its total deposits and assets had risen to $14.3 billion and $16 billion.

By comparison, Lehman Brothers was the fourth-largest U.S. investment bank with 25,000 employees, $639 billion in assets and $613 billion in liabilities at the time of its collapse and bankruptcy in 2008.

Lehman first got into mortgage-backed securities in the early 2000s and acquired five mortgage lenders. Its headlong leap into the subprime mortgage market with the U.S. housing bubble underway proved disastrous. In February 2007, Lehman’s stock price reached a record $86.18 per share, giving it a market cap of close to $60 billion. By the end of Q1 2007, cracks were showing in the U.S. housing market. Its collapse brought Lehman to its knees.

Companies and individuals lost vast amounts of money due to their investments in Lehman Brothers and its related businesses. It was the largest bankruptcy in history, and many questioned the decision to let Lehman fail, compared with the government’s tacit support for Bear Stearns.

A number of Silvergate’s prominent crypto clients announced they are suspending their business with Silvergate, including Coinbase, Circle, Bitstamp, Galaxy Digital and Paxos, Coin Telegraph reported. MicroStrategy, Binance and Tether all said they had no meaningful exposure to the bank.

The fact that Silverbank may go under is a bad signal for the whole industry and gives regulators a good example of what happens when the banking sector gets too close to crypto, Nikhilesh De reported for CoinDesk.

 Crypto firms will have to look for other banks and that may not be so easy. Until now, ” there hasn’t been a huge risk of contagion from crypto to the traditional financial sector,” De wrote. “That may finally be changing.”

Silvergate didn’t fail only because it banked crypto, De added. “But if crypto companies rushing to withdraw their funds – creating a bank run – led to Silvergate needing to sell off its bonds, which in turn led to it being under-capitalized, which has now led to the bank coming close to receivership, then this was another victim of last year’s massive failures and evidence of that contagion risk.”

It remains to be seen if Silvergate survives, or who will pick up its former clients, De concluded — “Signature Bank, the next-friendliest bank to crypto, or another of the myriad institutions out there or even a crypto-native company that has successfully run the gauntlet of the Federal Reserve Board application process.”