California-based Silvergate Bank has announced that it is winding down operations following a run on deposits. It is the first Federal Deposit Insurance Corporation (FDIC) backed bank failure since late 2020. The bank announced that due to “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.” Although Silvergate is a regulated bank its main focus is dealing in cryptocurrency.
Silvergate Banlfirst FDIC bank failure since late 2020.
The bank was founded as a Savings & Loan in 1988. In 2013, after its CEO Alan Lane personally invested in Bitcoin, the bank launched an initiative to start serving cryptocurrency clients. In 2013, CEO Alan Lane personally invested in Bitcoin, and Silvergate launched an initiative to start serving cryptocurrency clients. In January 2021 the bank announced that it had acquired intellectual property and other technology assets related to running a blockchain-based payment network from the Diem Group, this was the stablecoin originally known as Libra and was proposed by Facebook in 2018.
The bank developed an instant payment platform, Silvergate Exchange Network, (SEN), which enabled cryptocurrency exchanges, institutions, and customers to exchange fiat currencies such as US dollars and Euro. SEN was shut down last week after Coinbase and stablecoin issuers Paxos and Circle, said they would stop using the transfer service. Also last week, the collapsed FTX, which was one of its biggest customers, announced that $8.9 billion worth of customer funds were missing, largely due to loans made to Alameda. Silvergate held $1 billion in deposits from FTX at the time of the exchange’s collapse. Bloomberg reported in February that U.S. prosecutors in the Justice Department’s fraud unit were investigating Silvergate’s dealings between FTX and Alameda Research.
During the fourth quarter of 2022, the digital asset industry experienced a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies. These dynamics created a crisis of confidence across the ecosystem and led many industry participants to shift to a “risk off” position across digital asset trading platforms. In turn, the Company saw significant outflows of deposits during the quarter and took several actions to maintain cash liquidity. The Company initially utilized wholesale funding, and subsequently sold debt securities to accommodate sustained lower deposit levels and maintain its highly liquid balance sheet.
Silvergate Capital Corporation Announces Fourth Quarter 2022 Results
In the fourth quarter of 2022, Silvergate reported a net loss of $1.05bn compared with a profit of $18.4m in the same quarter a year earlier. For the full year 2022, it reported a worse-than-expected loss of $949m compared to a profit of $76m in 2021. Customer deposits fell by 52% in the fourth quarter as customers withdrew their funds during a “crisis of confidence” following the collapse of FTX. The bank sold $5.7bn in assets in the fourth quarter of 2022 at a loss of $751m in order to meet withdrawals and “maintain a highly liquid balance sheet”. It also took an impairment charge of $135m related to $1.7bn of assets it expected to sell in the first quarter of 2023.
“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. I’ve been concerned that when banks get involved with crypto, it spreads risk across the financial system and it will be taxpayers and consumers who pay the price. That’s why I am continuing to work with my colleagues in Congress and financial regulators to establish strong safeguards for our financial system from the risks of crypto.”
Senate Banking Committee Chairman Sherrod Brownourth