Silvergate Bank to shut down, liquidate due to crypto market turmoil

Silvergate Capital, or SI, announced Wednesday that it would shut down the operations of its crypto-focused bank, Silvergate Bank, and proceed with liquidation after the crypto market volatility caused many investors to pull out billions in deposits from the bank in recent months.

In a regulatory filing, the La Jolla-based holding company said the actions taken were the "best path forward." SI's action plan includes the repayment of all deposits held by the bank. The company is also reviewing the best method to resolve claims and retain the residual value of its assets, which include the bank's proprietary technology and tax 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."

Silvergate Capital, Parent Company of Silvergate Bank

SI has hired several institutions to help oversee the liquidation process. New York-based investment banking firm Centerview Partners serves as Silvergate's financial advisor, while white-shoe law firm Cravath, Swaine & Moore works as the bank's legal advisor. Silvergate also appointed finance firm Strategic Risk Associates to assist its project management transition.

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The new development caused SI shares to decline by more than 42 percent in after-hours trading on Wednesday. Earlier, the shares already closed 5.76 percent lower to $4.91.

Last week, the bank notified investors that it would delay the publication of its annual reports, saying that business and regulatory challenges raised concerns about the ability of the bank to resume business. After the notice, SI shares went down by more than half.

Crypto companies like Coinbase and Paxos attempted to minimize their exposures to Silvergate after the notice by withdrawing most of their assets from the bank.

The bank deactivated its Silvergate Exchange Network (SEN) last Friday. SEN was one of two platforms, alongside Signature Bank's Signet, that offered U.S. banking access outside regular hours to crypto companies.

Silvergate is a state-charted bank, meaning that it operates under the joint jurisdiction of the Federal Reserve and the State of California. Clothilde Hewlett, a commissioner of the California Department of Financial Protection and Innovation, said her agency is monitoring Silvergate's situation.

"The Department is evaluating compliance with all financial laws, as well as safety and soundness obligations, and is working closely with relevant Federal counterparts," Hewlett said.

Sources said Tuesday that the Fed had approved the Federal Deposit Insurance Corporation (FDIC) to start discussions with Silvergate to evade a shutdown. However, the Fed declined to comment on the Silvergate case.

About Silvergate Bank

Silvergate started to serve crypto clients, including the now-defunct Genesis, in 2014 under the direction of CEO Alan Lane. However, before focusing on digital asset clients, Silvergate was already an established regional bank since 1996, mostly dealing with the financing of small real estate contracts.

The bank provided banking access to numerous crypto startups by offering niche services compiled into the SEN, a platform that allowed users to make dollar transfers and loans anytime.

At the end of 2018, Silvergate held $1.8 billion in total deposits and owned $2 billion in assets. Later when the crypto market reached its peak in 2021, the bank's total deposits grew to $14.3 billion, while its asset value hit $16 billion.

Following the high-profile implosion of the crypto exchange FTX last November, Silvergate's total deposits and asset value went down to $6.2 billion and $11.3 billion, respectively, by the end of 2022.

The recent drop in deposits led to the contraction of the bank's leverage — the ratio of a firm's capital against its assets — by around 50 percent. In the third quarter of last year, Silvergate's leverage ratio was 10.7 percent but fell to 5.3 percent in the last quarter.