In 2023, the U.S. banking industry faced its most significant upheaval since the 2008 financial crisis, witnessing the second-, third-, and fourth-largest bank failures in the nation’s history. While the spotlight was primarily on First Republic Bank, Silicon Valley Bank, and Signature Bank, the first domino to fall was Silvergate Bank. Based in La Jolla, California, Silvergate Bank’s collapse marked the beginning of a financial turmoil that rippled through the sector. Notably, Silvergate’s downfall was tied to its reputation as a “crypto bank,” serving numerous clients in the digital assets industry.
Silvergate’s Bankruptcy – What Really Happened?
A new bankruptcy filing has shed light on Silvergate Bank’s final days, providing a narrative that goes beyond the initial story of a shrinking cryptocurrency sector and rising interest rates. According to Silvergate’s Chief Administrative Officer, Elaine Hetrick, the bank had stabilized by early 2023. Despite experiencing a massive drop in deposits due to the 2022 collapse of major crypto players like FTX and Three Arrows Capital, Silvergate still met regulatory capital requirements and was capable of serving its remaining customers.
However, the filing claims that a “sudden regulatory shift” forced Silvergate’s hand. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) allegedly made it clear that they would not allow banks with heavy exposure to the crypto sector to continue operating. This heightened scrutiny made it impossible for Silvergate to maintain its digital asset-focused business model.
The Timeline of Silvergate’s Fall
Silvergate’s collapse wasn’t abrupt—it unfolded over several years. The bank experienced rapid growth during the crypto boom of 2020 and 2021, with deposits ballooning from $1.8 billion in 2019 to $14.3 billion by the end of 2021. Crypto-related clients represented the majority of its deposits, particularly in non-interest-bearing accounts. But as the crypto market imploded in 2022, Silvergate saw a significant contraction in deposits, leading to a $948.7 million net loss by the end of that year.
Even with these losses, Silvergate had downsized enough to remain in operation by early 2023. It was this moment that marked the “inflection point” in the bank’s fate, according to Hetrick. Two public statements from federal banking regulators raised “significant safety and soundness concerns” about banks heavily involved in the cryptocurrency sector. Faced with regulatory pressure, Silvergate considered three options: pivot away from crypto, sell the bank, or begin winding down operations. Ultimately, the bank chose the third option, officially closing on March 8, 2023.
The Broader Implications
Silvergate’s downfall isn’t just a story of one bank’s misfortune; it’s a reflection of the broader regulatory environment. The increased scrutiny on banks serving digital asset clients impacted not just Silvergate but also Signature Bank, which collapsed days later under similar pressures. Silvergate’s closure highlighted the difficulties of running a bank that catered primarily to the volatile and highly regulated cryptocurrency sector.
What’s Next for Silvergate?
Silvergate’s parent corporation still holds over $163 million in cash and assets, according to the bankruptcy filing, and expects to repay bondholders fully. However, shareholders are unlikely to see any returns. The company is also battling legal challenges from activist investors seeking to recover funds for stockholders, further complicating its winding-down process.
Despite the bank’s controversial collapse, Silvergate’s management maintains that the institution did not “fail” but was forced into an impossible position by the rapidly changing regulatory landscape. The future of banking and cryptocurrencies remains uncertain, as the fallout from the 2023 crisis continues to unfold.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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