Following the bank’s ruin from the crypto meltdown, Silvergate Capital will liquidate

After the collapse of the cryptocurrency market, which caused billions in deposits to flee the bank in recent months, Silvergate Capital (SI) announced Wednesday afternoon that it will wind down operations and voluntarily dissolve its bank.

The La Jolla, California-based bank stated in a regulatory filing that it “believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path ahead” in light of recent regulatory and industry developments.

Silvergate explained that,

The wind down and liquidation plan of the Bank provides for the complete refund of all deposits. The business is also thinking about the best ways to settle disputes and protect the remaining value of its assets, particularly its in-house technology and tax assets.

In after-hours trading, shares of Silvergate have plunged more than 42%. On the first trading day of the previous year, the stock began trading for $150 per share.

Following the demise of cryptocurrency exchange FTX in late 2022, Silvergate reported a loss of about $1 billion and noted a drop in total deposits from users of digital assets to $3.8 billion from $11.9 billion through the fourth quarter.

The company announced exactly one week ago that it would postpone the submission of its annual report due to business and regulatory issues. The company cited these issues as the reason for the delay and said they had forced it to consider how much changes might affect its “ability to continue as a going concern for the twelve months.”

Last Thursday, the stock fell more than 50% as a result of the warning. In after-hours trading on Wednesday, shares plummeted below $3.00.

Following the warning from last week, cryptocurrency-related businesses that used the bank, including Coinbase, Paxos, Galaxy Digital, and others, cut ties with Silvergate, speeding up additional withdrawals.

On Friday afternoon, the business shut down the Silvergate Exchange Network (SEN). SEN was one of only two systems that provided crypto companies with access to U.S. banking outside of typical business hours, the other being Signature Bank’s Signet platform.

The Federal Reserve and the state of California work together to govern Silvergate Bank, a bank with a state charter. The Federal Reserve also oversees Silvergate Capital, its holding company.

According to a statement made by its commissioner, Clothilde Hewlett, the Department of Financial Protection and Innovation in California is keeping an eye on the situation.

Hewlett continued,

The Department is closely collaborating with relevant Federal counterparts and is examining compliance with all financial regulations, as well as safety and soundness duties.

Bloomberg stated Tuesday afternoon that the Federal Reserve had authorized the Federal Deposit Insurance Corporation (FDIC) to start negotiations with Silvergate in order to prevent a shutdown, citing an unnamed source. Since last week, FDIC investigators have been present at the company’s headquarters.

Federal Reserve officials declined to comment.

Silvergate has retained Centerview Partners LLC to serve as its financial advisor, Cravath, Swaine & Moore LLP as its legal counsel, and Strategic Risk Associates to assist with transition project management in conjunction with the liquidation.

Despite being a regional bank in 1996, Silvergate didn’t start working with cryptocurrency clients like the now-bankrupt Genesis until 2014, when CEO Alan Lane made the decision.

By granting banking access to an increasing number of cryptocurrency firms, the company carved out a niche for itself. These services eventually evolved into the SEN, which let crypto depositors to transfer money and borrow it around the clock.

By the end of the fourth quarter in 2018, Silvergate had $2 billion in assets and $1.8 billion in total deposits. Cryptocurrency’s total deposits and assets reached $14.3 billion and $16 billion, respectively, by the time it reached its peak in 2021.

By the end of the fourth quarter of 2017, Silvergate’s total deposits and assets had decreased to $6.2 billion and $11.3 billion, respectively, due to the bankruptcy of the cryptocurrency exchange FTX.

Due to the decline in deposits, Silvergate’s capital as a percentage of its assets decreased by 50%. This leverage ratio decreased from 10.7% in the third quarter to 5.3%, which is a level of particular concern for banks and below which regulators are justified in intervening for any U.S. bank.

The collapse of Silvergate raises additional concerns about whether US banks will avoid the market for digital assets, restricting access for cryptocurrency companies.

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