Top crypto bank collapses as Silvergate announces plans to wind down operations

With crypto’s rise and traditional banks’ hesitance to work with the volatile sector, Silvergate had established itself as one of the most important partners for the nascent industry, offering key financial services in exchange for soaring profits. By working 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 fortunes were tied to the industry, with 90% of its deposit base coming from crypto companies. As the bear market set in, Silvergate suffered severe outflows, including $8.1 billion in digital asset deposits in the fourth quarter of 2022 alone, exacerbated by the November collapse of one of its key clients, FTX.

Last week, Silvergate announced that it would be late in filing its annual report with the U.S. Securities and Exchange Commission, citing capital issues and uncertainty over its viability. The delay sparked an exodus of crypto clients, including Coinbase, Circle, and Paxos.

Rumors swirled that the Federal Deposit Insurance Corporation would place the bank into receivership and begin to find a buyer as soon as last Friday. One name floated among the crypto industry was Wells Fargo, although a Wells Fargo spokesperson denied the allegation to Coins2Day.

Although Silvergate announced on Friday that it would be closing its Silvergate Exchange Network, a 24/7 payments provider for clients, it lasted through the weekend. On Tuesday, Bloomberg reported that Silvergate was in talks with FDIC officials to salvage the bank.

Wednesday’s announcement, however, appears to be the end for Silvergate. By liquidating the bank, it is unclear whether it will find a single acquirer for its assets. A press release said that the bank believed that an “orderly wind down of Bank operations and a voluntarily liquidation of the Bank is the best path forward.”

With FDIC banking, all deposits owned by clients—whether individuals or corporations—would be insured up to $250,000, although that appears to not yet be a concern for Silvergate. In its press release, the bank said that the wind down and liquidation plan would include 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 with Silvergate voluntarily liquidating, rather than going into FDIC receivership.

“As the impact of FTX’s collapse continues to ripple outward, today we are seeing what can happen when a bank is overreliant 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 failure as “disappointing, but predictable” in a tweet, hinting that the bank may have been engaged in illegal activity.

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

A spokesperson for Silvergate told Coins2Day that they cannot comment beyond what is already publicly available.

With Silvergate’s fall, the crypto industry will have limited options for banking services. While some companies have begun to turn to the New York-based Signature Bank, it has signaled that it will reduce its digital assets business. Meanwhile, banking regulators have repeatedly issued guidances about liquidity risks associated with the crypto industry—a warning that will reverberate given Silvergate’s woes.

“There’s just a lot of problems that banks see, without a lot of reward,” former counsel to the Federal Reserve Bank of Chicago and Dickinson Wright partner Joseph Silvia told Coins2Day in an interview last week.