San Diego’s Silvergate Bank, which grew fast by catering to cryptocurrency traders, said late Wednesday that it is winding down operations and would liquidate amid mounting losses, customer defections and regulatory pressure.
The parent company of the bank, Silvergate Capital, announced after markets closed that it had voluntarily decided to cease operations as the “best path forward” given its deteriorating situation.
Bloomberg News reported late Tuesday that Federal Deposit Insurance Corp. officials were on site at the bank’s headquarters in an effort to salvage the institution.
The news of the shutdown sent Silvergate’s shares tumbling more than 43 percent in after-hours trading to $2.76 cents. That’s down from a high of $158 per share about a year ago during the height of the cryptocurrency boom.
The bank’s parent first raised red flags about its future last week in a filing with the U.S. Securities and Exchange Commission. It revealed that it risked becoming “less than well-capitalized” and was evaluating its ability to stay in business amid continuing losses.
Now, the company said it is working on a liquidation plan that includes “full repayment of all deposits.”
Silvergate also is figuring out the best way to resolve claims and preserve the value of its remaining assets, including its proprietary technology and tax assets. It did not mention bankruptcy.
Those assets could include a stable-coin digital currency, called Diem Association, which it acquired from Facebook-parent Meta last year for $182 million but never launched, as well as the technology behind the Silvergate Exchange Network, which allowed institutional traders to transfer U.S. dollars between various crypto exchanges in real time, seven days a week.
Led by Chief Executive Alan Lane, Silvergate tailored its business toward providing deposit accounts, fund transfers, and other banking infrastructure to the cryptocurrency industry.
It was wildly successful during the crypto boom coming out of the pandemic. But high-profile crypto bankruptcies, especially the collapse of FTX and subsequent criminal fraud charges against founder Sam Bankman-Fried, sent the bank’s finances into a tailspin. FTX had accounts at Silvergate, as did sister company Alameda Research.
Silvergate suffered a run on deposits after the collapse of FTX in November. It lost $1 billion in the fourth quarter alone when it was forced to sell debt securities intended to be held to maturity earlier than planned to cover deposit withdrawals. It laid off 181 workers in San Diego to trim expenses — including its chief credit officer and chief anti-money laundering and sanctions officer.
Last week, the bank disclosed that losses continued in January and February. The revelation led crypto-trading firms to publicly distance themselves from Silvergate, including Coinbase, Paxos Trust Galaxy Digital Holdings and Bitstamp, among others.
On Wednesday, Paxos Trust said in a statement it has “virtually no exposure to Silvergate … As a regulated institution, Paxos has always focused on protecting customers’ funds so banking redundancy is built into our platform.”
Silvergate shut down its Silvergate Exchange Network, or SEN, on Friday. The move foreshadowed the pending liquidation of the bank, said David Chiaverini, an analyst with Wedbush Securities.
“The SEN is Silvergate’s main flagship product that previously was the key attraction for depositors to bring funds to the bank, and we believe the discontinuation of the SEN could signal that Silvergate may consider winding down its operations,” said Chiaverini in a research note at the time. He estimated that the time frame to settle Silvergate’s affairs could take a year or longer.
Silvergate also has faced increased regulatory scrutiny recently. A group of U.S. senators led by Elizabeth Warren is probing why Silvergate’s anti-money laundering and Bank Secrecy Act compliance programs failed to red flag improper transfers related to FTX’s collapse.
Silvergate is a state-chartered bank under the supervision of the California Department of Financial Protection and Innovation. The agency “is monitoring the situation closely to facilitate the safe and expeditious voluntary liquidation of Silvergate Bank,” according to DFPI Commissioner Clothilde Hewlett. “The Department is evaluating compliance with all financial laws, as well as safety and soundness obligations, and is working closely with relevant Federal counterparts.”
Three top U.S. banking regulators — the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency — warned financial institutions of the high liquidity risks associated with crypto-asset deposits. The agencies pushed banks to perform “robust due diligence and ongoing monitoring” of crypto players with accounts at their banks.
Centerview Partners has been hired by Silvergate as acting financial adviser during the wind-down period. The law firm of Cravath, Swaine & Moore is Silvergate’s legal counsel and Strategic Risk Associates is providing transition project management aid.
Originally Published:
