San Diego-based crypto-focused bank Silvergate plans to close

Silvergate Capital Corp. plans to cease operations and liquidate the bank after the collapse of the crypto industry eroded the company’s financial strength. Shares fell more than 50%.

“Given recent industry and regulatory developments, Silvergate believes that an orderly liquidation of its banking operations and voluntary liquidation of the bank is the best way forward,” the company said in a statement.

Silvergate collapsed during a regulatory and criminal investigation by the Department of Justice’s fraud unit into deals with fallen crypto giants FTX and Alameda Research. While no wrongdoing was alleged, Silvergate’s woes worsened when the bank sold assets at a loss and shut down its flagship payments network, which it described as “the heart” of its crypto customer service group.

“Today we see what can happen when a bank becomes too dependent on a high-risk, volatile industry like cryptocurrencies,” said Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking, Housing and Urban Affairs Committee. a statement: “When banks get involved in crypto, it spreads the risk across the financial system, and it is taxpayers and consumers who pay the price.”

The company told investors on March 1 that it was evaluating whether it could continue to operate. It’s the first U.S. banking collapse since 2020, according to the FDIC’s website, which listed four in the first year of the pandemic.

Shares of Silvergate fell as low as $2.30 in extended New York trading following the announcement. The stock hit $220 in November 2021.

The company’s collapse could “put even more pressure on banks to demonstrate that their handling of crypto is safe and sound,” said Hilary Allen, a US university law professor who testified before Congress on FTX.

The company began lending to industrial clients in 1988, and records show it provided traditional services such as commercial and residential real estate loans. But in 2013, the La Jolla-based firm began pursuing crypto clients.

The idea was to build up non-interest-bearing deposits related to the service to these customers, then invest the money in a so-called conservative portfolio of interest-bearing deposits with other banks, short-term securities and loans. which we believe generates attractive risk-adjusted returns.”

The crypto-focused services allowed customers to send and send their money through the company’s own platform to each other to pay for digital assets. The network only handled US dollars and euros; the actual virtual currency transactions did not take place on Silvergate’s system.

Expanding its crypto business, Silvergate launched in 2019, telling investors in its prospectus that they expected an even bigger shift to crypto. Ultimately, the company’s Silvergate Exchange Network helped attract $11.9 billion worth of digital assets on deposit as of Sept. 30.

Three months later, after FTX filed for bankruptcy amid allegations of fraud, crypto deposits fled, leaving Silvergate with just $3.8 billion, according to a Jan. 5 statement. FTX was one of its largest clients and the sudden drop forced Silvergate to sell securities before they expired, taking heavy losses that drained its capital and liquidity.

In January, Silvergate Capital cut 40% of its approximately 450 employees.

The bank’s crisis deepened on March 2 as investors and business partners were shocked by new revelations about the bank’s problems and headed for an exit. Coinbase Global Inc., Galaxy Digital Holdings Ltd., Paxos Trust Co. and other crypto companies have decided to stop or accept payments through Silvergate.

In the end, Aaron Klein, a senior fellow at the Brookings Institution who studies financial technology and regulation, said the result wasn’t all that surprising.

“There’s nothing new here,” he said. “Short-term loans and long-term loans have been the subject of bank failures for centuries.”