Crypto Silver Gate – the Rise and Fall:
Silvergate Capital launched as a California-based community bank in the 1990s. In the last decade, the progression of digital currencies found the bank offering traditional financial services to crypto organizations.
The bank’s central selling point was the provision of deposits from crypto traders and exchanges, allowing a system for easy access to crypto assets in a traditional bank. Unlike banks with a structured approach unfriendly to crypto, Silvergate allowed 24/7 payment and exchange access for crypto traders.
Its innovative decision to launch into the crypto sphere placed Silvergate as one of the most renowned banks for crypto transactions. In no time, it created its instant payment solution, the Silvergate Exchange Network. This enabled Silvergate customers to send U.S. dollars from a Silvergate account anytime, anywhere, to buy crypto.
Even though Silvergate did not deal directly with crypto, it made trading crypto easier for its clients. In no time, the bank’s stocks reached an all-record high of $220 in November 2021. The bank even envisioned issuing its stablecoin when it bought assets from Meta’s Diem.
Silvergate’s entire growth trajectory collapsed after FTX bankruptcy last year. Firstly, the U.S. Department of Justice began investigating the bank’s involvement in the FTX bankruptcy. This investigation had a ripple effect because its stock hit a low of $8, and JPMorgan also relegated the stock from neutral to underweight in no time.
In addition, the bank reported losses for the fourth quarter of 2022 of over $1 billion and cut 40% of its workforce, citing the economic downturn of the crypto industry. Following this blowup, there was a bank run when depositors withdrew over $10 billion in reserves.
January this year saw a group of senators questioning Silvergate’s role in the FTX bankruptcy. They were also criticized for taking a loan from the Federal Home Loan Bank of San Francisco because that move could introduce crypto risk into the traditional banking system. Banking partners like Coinbase and Galaxy Digital also cut their affiliation with the bank.
The bank also faces class action lawsuits claiming it failed to inform investors that it lacked the necessary protection to detect money laundering on its platform.
By March 3, it discontinued its Silvergate Exchange platform services. The cumulative effect of the FTX bankruptcy, investigations into the bank, and general losses led the bank to declare that it was shutting down its operations and having voluntary liquidation.
The shutdown of Silvergate makes it the third-largest bank shutdown in U.S. history.
Although crypto has thrived in years past, the recent economic meltdown has been causing turbulence within the industry. The attendant effect is that crypto exchanges, cryptocurrencies and any other crypto affiliation will be affected.
These circumstances and several wrong turns taken by Silvergarte led to what is now termed the third-largest bank shutdown in American history. Rather than making traditional institutions more open to crypto, Silvergate’s shutdown is an example of banks that venture into the volatile crypto space. FDIC is currently the bank’s receiver and has assured depositors full access to their money.