Silvergate Capital, a bank that specialized in serving the crypto industry, has announced that it has fully repaid all its deposit liabilities after shutting down operations and liquidating its assets. The bank was hit hard by the market crash that wiped out billions of dollars from the crypto sector in early 2023.
Silvergate Capital was founded in 1988 as a traditional community bank in California. In 2013, it decided to pivot to the emerging crypto space and became one of the first banks to offer services to crypto companies, such as exchanges, miners, custodians, and funds. The bank developed a proprietary platform called the Silvergate Exchange Network (SEN), which enabled real-time transfers of U.S. dollars between its customers and crypto platforms. The bank also offered loans backed by crypto collateral, known as SEN Leverage.
Silvergate Capital went public in 2019 and saw its stock price soar as the crypto market boomed in 2020 and 2021. The bank reported a net income of $117 million in 2021, up from $30 million in 2020. It had over 1,100 crypto customers and over $11 billion in assets by the end of 2021.
How Silvergate collapsed amid crypto turmoil
However, Silvergate’s fortunes reversed in 2022, when the crypto market experienced a sharp downturn amid regulatory crackdowns, hacking incidents, and environmental concerns. The bank’s main customers, such as FTX, Coinbase, and Galaxy Digital, suffered huge losses and withdrew their deposits from Silvergate. The bank’s loan portfolio also deteriorated as the value of the crypto collateral plummeted. The bank reported a net loss of $978 million in the fourth quarter of 2022, and its customer deposits dropped 68% to $3.8 billion.
Silvergate faced multiple investigations from the Department of Justice, the Federal Reserve, the California Department of Financial Protection and Innovation, and the Congress over its involvement in the crypto industry. The bank also faced lawsuits from its shareholders, creditors, and customers over its alleged mismanagement, fraud, and negligence.
In March 2023, Silvergate announced that it would discontinue its SEN platform and delay the filing of its annual 10-K for 2022, citing the uncertainty over its viability and the regulatory pressure. The bank also laid off 40% of its workforce and hired Centerview Partners and Cravath, Swaine & Moore as its financial and legal advisors.
In April 2023, Silvergate announced that it would wind down its operations and liquidate its bank, saying that it was the best path forward in light of the recent industry and regulatory developments. The bank said that it had sold most of its assets and repaid all of its deposit liabilities, as well as its senior debt and subordinated debt. The bank did not disclose how it would resolve the claims against its business or how much it would return to its shareholders.
What Silvergate’s demise means for the crypto industry
Silvergate’s demise is a major blow to the crypto industry, which has lost one of its main banking partners and supporters. Silvergate was one of the few banks that understood and embraced the crypto sector, and provided essential services and infrastructure to its participants. The bank’s liquidation leaves a gap in the market that will be hard to fill by other banks, especially in the current regulatory environment.
Silvergate’s downfall also highlights the risks and challenges that crypto companies face in dealing with the traditional financial system. Crypto companies need reliable and compliant banking services to operate and grow their businesses, but they also face scrutiny and hostility from regulators, lawmakers, and competitors. Crypto companies need to balance innovation and regulation, and find ways to protect themselves from market volatility and cyberattacks.
Silvergate’s story is a cautionary tale for the crypto industry, and a reminder of the need for more collaboration and cooperation among its stakeholders. The crypto industry needs to work together to create a more stable and sustainable ecosystem, and to foster trust and transparency with the public and the authorities.