What happened to Silvergate Capital? And why does it matter?

What is Silvergate Capital?

Silvergate Capital used to be a California-based community bank that launched in the late 1990s. In 2013, it pivoted into cryptocurrencies to offer traditional financial services to crypto companies, including exchanges like FTX, which filed for bankruptcy in November 2022. This was before any other banks were thinking about crypto, inevitably making Silvergate an essential part to the entire crypto industry.

One service that Silvergate operates is the Silvergate Exchange Network, an instant payment platform that enables Silvergate clients to send U.S. dollars to any Silvergate account, even when traditional banks are closed on nights and weekends.

Even though the bank didn’t directly deal with cryptocurrencies, because withdrawals and deposits were done in fiat currencies, most of its clients dealt with crypto, meaning it was hard hit when the crypto market slumped last year. This included FTX, one of the largest crypto exchanges in the industry before it filed for Chapter 11 bankruptcy.

What happened?

In just a little over a year, Silvergate Capital’s stock price dropped around 95% since its record high in November 2021. In March of last year, investors were excited about Silvergate’s potential and the prospect of it possibly issuing a stablecoin after it bought assets from Meta’s Diem, which was part of Meta Platform’s effort to build a payments network.

Earlier this year, market makers like Blackrock
BLK,
-2.50%
and Citadel announced having a stake in Silvergate, at 7% and 5.5% respectively.

But things quickly changed earlier this month after Silvergate warned that it was delaying its annual report to the U.S. SEC and evaluating its ability to operate. Earlier this year the bank had reported a $1 billion loss for its fourth quarter as investors withdrew deposits in the wake of the FTX bankruptcy as the exchange was once one of Silvergate’s biggest customers. In January, the firm had also laid off 40% of its staff.

In January, a group of U.S. senators sent a letter to the bank questioning its role in FTX’s business practices. The letter also criticized the bank for taking out a loan from the Federal Home Loan Bank of San Francisco (FHLB) which could “further introduce crypto market risk into traditional banking system.”

The bank was facing multiple lawsuits that accuse the firm of failing to alert investors that it lacks the necessary protections needed to detect money laundering on the platform.

On Wednesday, the firm finally said it’s winding down operations and liquidating its bank, causing the stock price to plunge more than 36% in after-hours trading.

“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 bank said in a statement. “The Bank’s wind down and liquidation plan includes full repayment of all deposits.”

The company didn’t outline how it plans to resolve claims against its business.

The price of Bitcoin
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and Ether
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took a hit as a result of the news, but also because of a range of other events that occurred this week.