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Silvergate Bank folds, sparking a wave of finger-pointing and panic selling
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(Kitco News) - The struggles facing the beleaguered crypto-focused Silvergate Bank (NYSE:SI) became too much to handle on Wednesday as the bank announced that it will be winding down its operations and will voluntarily liquidate the bank “in an orderly manner and in accordance with applicable regulatory processes.
Silvergate determined that this was the best course of action in light of recent industry and regulatory developments amid a crackdown on banks working with the crypto ecosystem by the Securities and Exchange Commission (SEC).
The struggles for Silvergate began in Q4 2022 when it was forced to fulfill $8.1 billion in customer withdrawals, losing $718 million in the process, a sum that was greater than all of the bank’s profits since 2013 combined. In January, the firm announced that it was laying off 40% of its staff and liquidating some of the debt held on its balance sheet in an effort to stay afloat. Still, the industry's ongoing struggle proved to be too much for the bank to remain in operation.
“The Bank’s wind down and liquidation plan includes full repayment of all deposits,” the press release said. “The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”
As part of its wind down, the bank discontinued the Silvergate Exchange Network (SEN) on Friday. All other deposit-related services will remain operational while the company progresses through the closing process.
The backlash from Capitol Hill was swift, with Senator Elizabeth Warren saying Silvergate’s failure was “disappointing, but predictable,” and called on regulators to “step up against crypto risk.”
As the bank of choice for crypto, Silvergate Bank's failure is disappointing, but predictable. I warned of Silvergate's risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole & regulators should step up against crypto risk.
— Elizabeth Warren (@SenWarren) March 8, 2023
Senator Sherrod Brown, Chair of the Senate Banking, Housing and Urban Affairs Committee, issued a statement saying the collapse of Silvergate is what happens 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,” Brown wrote. “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.”
Caitlin Long, the founder and CEO of Custodia Bank, pushed back against Brown’s comments, saying he was misinformed that it was crypto that triggered Silvergate’s issue. “What did it was $13.3bn in demand deposits that depositors [could] withdraw in minutes, but only $1.4bn of cash. Had SI held $13.3bn of cash, the bank run wouldn’t have impaired its capital. Not a crypto prob.”
Adam Cochran, an analyst who contributes to several decentralized finance projects, including Yearn.finance and Synthetix, took his response a step further and pointed to the design of the banking system.
“Silvergate didn't fail because of crypto risk, or because of illegal actions (that we know of),” Cochran tweeted. “It failed because it followed the OCC rules for bank partial reserves, bought low liquidity Muni Bonds and then had a bank run. This was a failure of banking, not crypto.”
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Coinbase drops Silvergate after they delay annual SEC filing, SI stock plunges 50% |
Nic Carter, co-founder of venture firm Castle Island and crypto intelligence firm Coin Metrics, directly pointed to the government as the culprit behind Silvergate’s collapse, saying that the bank's demise was hastened by launching investitgations and legal attacks against it.
“Regarding the logic here, a single small bank fails (in a generally elegant way - not clear there are any actual “bad consequences” beyond shareholders losing money?) and this vindicates a crackdown on an entire legal industry? What kind of completely bizzaro reasoning is that?” Carter wrote. “The government also hastened the collapse of Silvergate by launching investigations and legal attacks on them. They’re the arsonist and the firefighter in one.”
Silvergate stock (SI) now trades at $3.15, a 98.8% decline from its peak of $240 in November 2021. And it's not just crypto fans who have been hit by the bank's demise, as major players like Citadel Securities and BlackRock recently made bets on the firm's ability to bounce back from its struggles.
Investment firms Citadel Securities and BlackRock recently took major stakes in Silvergate, buying up 5.5% and 7%, respectively.
— unusual_whales (@unusual_whales) March 9, 2023
Silvergate Capital announced it was winding down operations yesterday.
In the larger scheme of things, the demise of Silvergate is causing some short-term pain in the crypto market, but from a macro perspective, the long-term outlook remains positive as increased investments in the sector from some of the largest players in the global financial market signals an ongoing shift towards the integration of blockchain technology and cryptocurrencies into society.
Silvergate could be a substantial loss for the markets.
— Michaël van de Poppe (@CryptoMichNL) March 9, 2023
However, Fidelity, Blackrock, and more jumping into the #crypto markets is a larger impact long-term than the loss of Silvergate.
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