Silvergate Bank’s Collapse: What Happened and What Does It Mean for Crypto Banking?
Silvergate Bank was one of the leading banks for cryptocurrency businesses, offering services such as deposit accounts, wire transfers, and crypto-backed loans. The bank had over 1,100 crypto clients and over $10 billion in deposits as of December 2022. It was also one of the few banks that supported the Silvergate Exchange Network (SEN), a platform that enabled fast and secure transactions between crypto exchanges and institutional investors.
However, in March 2023, Silvergate Bank collapsed after a major crypto exchange, FTX, went bankrupt due to a cyberattack. FTX was a prominent customer of Silvergate Bank and owed it more than $2 billion in loans. The exchange’s failure triggered a massive bank run on Silvergate Bank, as many customers feared losing their money. Silvergate Bank could not meet the demand for cash and had to sell its assets at a loss and borrow billions from a federal agency. The bank’s failure seriously affected the crypto industry and the financial system, disrupting many transactions and operations.
In this post, we will explore what caused Silvergate Bank’s collapse and its implications for the future of crypto banking.
How FTX’s Bankruptcy Triggered a Bank Run on Silvergate Bank
FTX was one of the world’s largest and most popular cryptocurrency exchanges, with over 10 million users and over $100 billion in monthly trading volume. The exchange offered various products and services, such as spot trading, futures contracts, options, leveraged tokens, prediction markets, and decentralized finance (DeFi) platforms.
FTX was also a major customer of Silvergate Bank, as it used its services to facilitate its transactions and operations. Silvergate Bank’s financial reports show that FTX accounted for about 20% of its total deposits and loans as of September 2022. FTX also relied on Silvergate Bank’s SEN platform to enable fast and secure transfers between its accounts and other crypto clients.
However, on November 11th, 2022, FTX announced that it had filed for bankruptcy in the US due to a series of cyberattacks that resulted in the loss of “substantial” assets. The exchange said it had been hacked by unknown attackers who exploited a vulnerability in its system and transferred hundreds of millions of dollars worth of cryptocurrencies to external wallets. FTX also said it had been unable to access some of its funds due to frozen bank accounts and legal disputes.
The news of FTX’s bankruptcy shocked the crypto industry and caused panic among its users and creditors. Many people tried to withdraw their funds from FTX’s platform or claim their share of the remaining assets. However, FTX claimed it had limited liquidity and could not process all the requests. It also said it was working with regulators and lawyers to find a way to return money to its customers.
The bankruptcy of FTX also directly impacted Silvergate Bank, as it meant that the bank could not recover its loans from FTX or receive any deposits from FTX’s customers. Moreover, many other crypto clients who used Silvergate Bank’s services became worried about their money and started withdrawing their funds from the bank. This created a massive bank run on Silvergate Bank, which faced an unprecedented surge in cash outflows.
How Silvergate Bank Failed to Recover from the Bank Run
Silvergate Bank tried to cope with the bank run by borrowing money from other sources and reassuring its customers that it was still solvent and operational. However, these efforts proved insufficient and ineffective, as the bank continued to lose money and trust.
One of the sources that Silvergate Bank relied on was the Federal Home Loan Bank (FHLB) system, a network of regional banks that provide liquidity to member institutions. Silvergate Bank borrowed $4.3 billion from FHLB in Q4 2022, more than its total assets at that time. However, this also increased its debt burden and interest expenses, which eroded its profitability and capital.
Another source of funds that Silvergate Bank used was its own capital raise, which it announced in December 2022. The bank planned to raise $500 million through a private placement of common stock at $10 per share. However, this offer was met with low demand and skepticism, as many investors doubted the bank’s viability and valuation. The capital raise was eventually canceled due to a lack of interest.
Silvergate Bank also tried to reassure its customers and regulators that it could still operate and meet its obligations. The bank issued several statements claiming it had enough liquidity and capital to withstand the crisis. It also said that it was working closely with federal agencies such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to ensure compliance and stability.
However, these reassurances did not stop the bank run or restore confidence in Silvergate Bank. Many customers continued to withdraw their funds or switch to other crypto-friendly banks such as Signature Bank or Anchorage Digital Bank. Many regulators also increased scrutiny and pressure on Silvergate Bank, questioning its risk management practices and financial health.
As a result, Silvergate Bank faced a severe liquidity crisis that forced it to announce its voluntary liquidation on March 8th, 2023. The bank said that it had decided to cease operations as the “best path forward” given its deteriorating situation. The bank also said that it would work with FDIC and other authorities to distribute its remaining assets among its creditors and depositors.
What Silvergate Bank’s Collapse Means for the Crypto Industry
Silvergate Bank’s collapse has significant implications for the crypto industry, affecting many stakeholders and aspects of the sector. Some of the major impacts are:
- Loss of a major crypto-friendly bank: Silvergate Bank was one of the few banks that offered banking services to crypto businesses and investors, such as deposit accounts, wire transfers, loans, custody and settlement. It also operated the Silvergate Exchange Network (SEN), a platform that enabled real-time transfers of U.S. dollars between its customers and crypto exchanges. With Silvergate Bank’s exit, many crypto customers will have to find alternative banking partners or face disruptions in their operations and transactions.
- Regulatory uncertainty and scrutiny: Silvergate Bank’s collapse raises questions about regulating and supervising crypto-related banking activities. The bank was regulated by both state and federal authorities, such as the California Department of Financial Protection and Innovation (DFPI), the Federal Reserve and the FDIC. However, it is unclear how these agencies coordinated their oversight and enforcement actions on Silvergate Bank, especially after it faced liquidity problems due to FTX’s collapse. Moreover, Silvergate Bank’s failure could prompt regulators to impose stricter rules and requirements on other banks that deal with crypto assets or customers.
- Reputation damage and trust erosion: Silvergate Bank’s collapse also damages the reputation and trust of the crypto industry among investors, customers and regulators. The bank was seen as a pioneer and leader in providing banking solutions to the crypto sector, with a strong growth and innovation track record. Its failure casts doubt on the viability and sustainability of other crypto-focused banks or financial institutions. It also exposes crypto businesses’ risks and challenges regarding liquidity management, market volatility, cyberattacks and fraud.
Silvergate Bank’s collapse is a significant blow to the crypto industry, as it affects many aspects and stakeholders of the sector. The bank’s failure shows the fragility and vulnerability of crypto-related banking activities and the need for better regulation and supervision. It also highlights the importance of trust and reputation in crypto, which can be easily lost or damaged by external shocks or internal mismanagement. Silvergate Bank’s exit leaves a gap in the market that will be hard to fill by other players and poses a challenge for the future development and growth of the crypto industry.
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