Caiz Insights: Silvergate Bank Announces Liquidation Plans Sending Shockwaves Through Crypto Industry
Silvergate Bank, a prominent player in the cryptocurrency industry, has announced its intention to wind down operations and liquidate, according to a statement issued by its holding company on Wednesday (March 7th, 2023). This news has sent shockwaves through the Crypto industry, particularly following the collapse of FTX in November 2022. As a result of this announcement, shares in Silvergate Capital (SI), the San Diego-based crypto bank that is currently under regulatory investigation, lost almost 50% of their value.
- According to Silvergate Capital, it will cease operations and liquidate its cryptocurrency bank.
- Following the announcement, Silvergate shares fell more than 40% in extended session.
- The US Department of Justice and other regulators are looking into the corporation.
- Ethical Conduct and Transparency in Finance: Lessons Learned from Silvergate Bank’s Liquidation Announcement
Silvergate stock tumbled 31% in after-hours trading to $3.40.
Is FTX somehow implicated in this crisis?
Silvergate Bank’s connection to the collapsed cryptocurrency exchange, FTX, and its affiliate, Alameda Research, has come under scrutiny and may be a motivating factor behind the ongoing investigations. Last week, the bank announced on its website that it would be discontinuing the Silvergate Exchange Network (SEN). This decision follows a significant decline in the value of Silvergate’s shares, which have plummeted by more than 80% since the collapse of FTX in November.
According to a report by the Wall Street Journal in January, Silvergate Bank’s customers withdrew $8.1 billion in digital deposits in the fourth quarter of 2022 following the FTX collapse, leading the bank to sell assets at a loss in an attempt to recover. It is important to note that Silvergate Bank has not been found guilty of any wrongdoing at this time and remains under investigation.
“In light of recent 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. 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,” Silvergate Corp. said in a press release.
The California Department of Financial Protection and Innovation (DFPI), which serves as the state regulator for Silvergate Bank, has issued a statement acknowledging the situation and confirming that it is monitoring the bank’s compliance with financial laws and safety and soundness obligations. DFPI Commissioner Clothilde Hewlett has also stated that the department is working closely with relevant federal agencies. The White House has also expressed awareness of the situation, with Press Secretary Karine Jean-Pierre stating earlier this week that the presidential administration is monitoring the developments. Jean-Pierre added that President Joe Biden will continue to push Congress to address crypto-related issues.
Senate Banking Committee Chairman Sherrod Brown (D-Ohio) has released a statement expressing concern over the situation and warning of the risks associated with banks’ involvement in the volatile cryptocurrency sector. Brown emphasized the importance of establishing strong safeguards for the financial system to protect taxpayers and consumers from the potential risks of crypto. The Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency have declined to comment on the matter.
Silvergate Bank came under scrutiny recently when it announced that it would be delaying the filing of its annual 10-K report due to concerns raised by its independent auditors and accounting firm over its financial figures. In its latest announcement on Wednesday, the bank’s holding company, Silvergate Corp., disclosed that it has engaged Centerview Partners as a financial advisor, along with the law firm Cravath, Swaine, and Moore LLP and Strategic Risk Associates, to provide assistance during the transition period. As part of its winding down process, Silvergate Corp. has pledged to repay all deposits in full.
A Bit of Background on Silvergate
Silvergate Bank began servicing crypto clients in 2014, giving banking access to a growing number of crypto startups. This offering evolved into the Silvergate Exchange Network (SEN), where crypto depositors could make U.S. dollar transfers and loans 24/7 outside traditional banking hours. At its peak in 2021, the bank held $14.3 billion in total deposits and $16 billion in assets. However, following the bankruptcy of crypto exchange FTX, which the bank was tied to, its total deposits and assets fell to $6.2 billion and $11.3 billion, respectively, by the end of 2021. The bank’s liquidation plan includes the full repayment of all deposits. Silvergate’s capital relative to its assets shrank by half, and its leverage ratio fell from 10.7% to 5.3%, a level of specific concern for banks with regulators having reason to step in for any U.S. bank below 5%. This raises questions about the future involvement of U.S. banks in the digital asset industry and potential constraints for crypto firms. Regulators, including the California Department of Financial Protection and Innovation and relevant Federal counterparts, are monitoring the situation.
In light of this situation, it is worth reflecting on the importance of regulation adherence, ethical conduct, and principled behavior in finance. The reasons leading to this crisis are still not clear. However. the collapse of Silvergate Bank serves as a reminder of the need for accountability and transparency in the industry. By adhering to regulations, and ethical standards and promoting responsible conduct, financial institutions can help prevent situations such as this from occurring. It is encouraging to note that Silvergate Capital has stated its commitment to fully repay all deposits and maintain most deposit-related services throughout the liquidation process.
While Silvergate Bank has not been found guilty of any wrongdoing at this time, it is clear that finance ethics and principled, accountable behavior are of utmost importance in preventing such insolvency. This situation emphasizes the importance of establishing strong safeguards for the financial system to protect taxpayers and consumers from the potential risks of crypto. The involvement of U.S. banks in the digital asset industry may face constraints, and regulators are monitoring the situation closely. As the crypto industry continues to evolve and expand, it is crucial for financial institutions to prioritize transparency, compliance, and ethical behavior to ensure the stability and sustainability of the industry.
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