Yesterday Silvergate Capital said it would wind down its Silvergate Bank subsidiary in an orderly manner. The company was one of the few regulated FDIC banks that supported the cryptocurrency sector and focused the most on digital assets.
“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 statement says. “The Bank’s wind down and liquidation plan includes full repayment of all deposits.”
Two weeks ago, the Federal Reserve, OCC and FDIC reiterated warnings about bank engagement in the sector.
After Silvergate raised the flag a week ago about doubts over its ability to keep going for the next year, the writing was on the wall. The news accelerated a run that started with the collapse of FTX. It also faced investigations about its role as the bank that accepted FTX client deposits via Alameda Research.
Silvergate built up losses of almost a billion dollars last year, largely because it needed to sell securities to meet deposit withdrawals by crypto companies. And the withdrawals continued this year, resulting in further losses and the going concern warning.
After the going concern statement, numerous crypto companies announced they would no longer process transactions via Silvergate.
A few days later, it discontinued its Silvergate Exchange Network (SEN), which acted as a fiat on and off-ramp for crypto companies. It says other deposit-related services are still operational.
The bank added that it is “considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.” It acquired the technology of the Diem stablecoin platform for $182 million and wrote off $196 million at the end of last year.
In many ways, the fact that the bank can return deposits is an impressive feat. Its problem was the specialization in the crypto sector with the lack of diversification making it vulnerable to mass withdrawals. On the other hand, if it had been more diversified, perhaps it would not have been able to repay all creditors.
Signature Bank is far more diversified and has not been that badly hit. However, its stock is down 7% in after-hours trading.
Meanwhile, today there will be a Congressional hearing focusing on digital asset regulation, including allowing banks to participate in the sector.