Federal Reserve Demands Silvergate to Cease Operations Safeguarding Depositors and Ensuring Cash Preservation – What Lies Ahead?

On Thursday, June 1, the US Federal Reserve issued a consent order, ordering Silvergate Bank to implement its previous plans for voluntary self-liquidation. 

The order ensures that Silvergate moves on with its March 8 plans to shut down operations to protect its depositors and the deposit insurance fund.

The Federal Reserve also noted that Silvergate must not distribute capital, dissipate cash assets, and engage in other activities without regulatory approval.

Silvergate Winding Down Due To Crypto Market and Regulatory Turmoil 

On March 8, the crypto-focused bank, Silvergate Capital, announced plans to shut operations and voluntarily liquidate. 

That decision came after the bank incurred massive losses following the sudden implosion of the FTX exchange, plunging its shares by 35% in after-hours trade.

Silvergate had warned a week before the sunsetting announcement that it was evaluating its ability to continue operations. 

The bank disclosed that it sold additional debt securities at a loss this year, implying that it could be less capitalized.

The California-based Silvergate Bank’s ordeal reflected the severity of the FTX collapse‘s impact on the crypto asset industry. 

In a statement, Silvergate said the decision to close shop was “the best path forward,” given “recent industry and regulatory developments.”

Silvergate explained that the decision relates to its inability to cope with heightened regulatory scrutiny from banking regulators, congressional inquiries, litigations, and Department of Justice investigations. 

The bank noted that its wind-down and liquidation plan would include full deposit reimbursement to depositors. 

Silvergate also said it was considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.

US Bank Regulators Warn Banks Of Risk Involved In Crypto

It is worth noting that over 90% of Silvergate’s deposits came from crypto-related firms. 

As such, the FTX’s bankruptcy in November last year threw depositors into panic, resulting in a classic bank run. The deposit withdrawal run didn’t go unnoticed by US bank regulators.

The Office of the Comptroller of the Currency and the Federal Reserve issued a joint statement in February, warning banks about liquidity risks resulting from crypto-asset market vulnerabilities.

Silvergate’s shutdown triggered the collapse of several traditional US-based banks, including Silicon Valley Bank and Signature Bank. 

While US bank regulators and Federal Reserve said they want to safeguard depositors, others suggest they intend to scare off traditional banks from doing business with crypto firms.

Justin d’Anethan, institutional sales director at Amber Group (a Singapore-based digital assets firm), told Cointelegraph:

“For retail, if based in the US, it will be trickier. Ironically, in a bid to protect retail investors, regulators might stop them from getting exposure to an industry that—if history is any guide—keeps on growing and gaining adoption worldwide.”