Top crypto bank collapses as Silvergate announces plans to halt operations

With the rise of crypto and traditional banks’ reluctance to partner with the volatile sector, Silvergate had established itself as one of the key partners for the burgeoning industry, offering essential financial services in exchange for rising profits. By partnering with crypto’s top companies, from Coinbase to FTX, Silvergate’s share price rose more than 1,500% between November 2019 and November 2021.

The bank’s assets were tied to the industry, with 90% of its deposit base coming from crypto companies. As the bear market hit, Silvergate suffered severe outflows, including $8.1 billion in digital asset deposits in the fourth quarter of 2022 alone, exacerbated by the collapse of one of its key clients, FTX, in November.

Last week, Silvergate said it would be late filing its annual report with the SEC, citing capital concerns and uncertainty about its profitability. The delay sparked an exodus of crypto customers including Coinbase, Circle, and Paxos.

Rumors circulated that the Federal Deposit Insurance Corporation would put the bank under receivership and begin looking for a buyer as early as last Friday. One name that popped up in the crypto industry was Wells Fargo, although a spokesman for Wells Fargo denied the claim wealth.

Although Silvergate announced on Friday that it was shutting down its Silvergate Exchange Network, a 24/7 payment provider for customers, it lasted until the weekend. On Tuesday, Bloomberg reported that Silvergate is in talks with FDIC officials to bail out the bank.

However, Wednesday’s announcement appears to be the end for Silvergate. Due to the bank’s liquidation, it is unclear whether it will find a single buyer for its assets. According to a press release, the bank believes that “an orderly winding-up of the banking business and a voluntary liquidation of the bank is the best way forward”.

With FDIC banking, all deposits held by customers — whether individuals or businesses — would be insured up to $250,000, although that doesn’t appear to be an issue for Silvergate just yet. In its press release, the bank said the resolution and liquidation plan would include the full repayment of all deposits.

Silvergate is the first failure of an FDIC-backed bank since 2020 and only the ninth since 2017, although the case is different as Silvergate is voluntarily liquidating rather than going into FDIC receivership.

“As the ramifications of FTX’s collapse continue to spread outward, today we see what can happen when a bank becomes over-reliant on a risky, volatile sector like cryptocurrencies,” said Sen. Sherrod Brown (D-Ohio), the Chair of the Senate Banking Committee, in a statement. Sen. Elizabeth Warren (D-Mass.) described the outage as “disappointing but predictable” in a tweetsuggesting that the bank may have been involved in illegal activities.

The California Department of Financial Protection and Innovation, Silvergate’s state regulator, said it was monitoring the situation to facilitate voluntary liquidation.

A Silvergate spokesman said wealth that they cannot go beyond what is already publicly available.

With the fall of Silvergate, the crypto industry will have limited options for banking services. While some businesses have started reaching out to New York-based Signature Bank, it has signaled it will scale back its digital assets business. Meanwhile, banking regulators have repeatedly issued guidance on liquidity risks related to the crypto industry – a warning that will resonate amid Silvergate’s woes.

“There’s just a lot of problems that the banks see without much reward,” said Joseph Silvia, a former Federal Reserve Bank of Chicago attorney and Dickinson Wright partner wealth in an interview last week.

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