In a major blow to the cryptocurrency industry, Silvergate Bank, one of the few banks that embraced the crypto sphere, has announced its voluntary liquidation. The California-based bank, known as the “crypto bank,” cited exposure to numerous bankruptcies of cryptocurrency firms since last summer as the reason for its downfall.
In a press release on Mar. 8, the company announced its intent to wind down operations and voluntarily liquidate the bank in an orderly manner and in accordance with applicable regulatory processes. The bank’s wind-down and liquidation plan includes full repayment of all deposits. The company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.
While the bank has stated that the Federal Deposit Insurance Corporation (FDIC) is not involved and that taxpayers’ money will not be used, the liquidation is due to pressure from regulators, particularly the Department of Justice (DoJ), which has opened an investigation into Silvergate’s business relations with the empire of the former crypto king, Sam Bankman-Fried, who has been charged with twelve counts of fraud. Bankman-Fried’s empire consisted of bankrupt cryptocurrency exchange FTX and its sister company Alameda Research.
Despite regulators never publicly accusing Silvergate of any wrongdoing, its association with Bankman-Fried’s empire has created concerns. Besides FTX and Alameda Research, Reuters reported last month that Binance, the world’s largest cryptocurrency exchange, had access to a bank account belonging to its American subsidiary, Binance.US, which was held at Silvergate Bank. Binance executives transferred hundreds of millions from this account to a trading platform, Merit Peak, managed by Changpeng Zhao, the founder of Binance and a major rival of Sam Bankman-Fried.
In 2013, Silvergate (SI) began to court cryptocurrency firms when traditional banks were reluctant to do so due to the opacity prevailing in the sector, becoming the “crypto bank.” The firm made its IPO in 2019, promising a complete refocus on the industry, which was then experiencing a renaissance. As of Sep. 30, Silvergate had $11.9 billion in digital assets held as deposits. However, the bankruptcy of FTX and Alameda on Nov. 11 scared away customers. The bank thus reported only $3.8 billion in digital assets held as deposits as of Dec. 31. FTX was one of Silvergate’s big customers. After its Mar. 1 warnings, Silvergate’s few remaining crypto clients also fled.
Coinbase, Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy Digital, and Gemini all said on Mar. 2 that they would suspend automated clearing house (ACH) transfers and other business operations with the bank. LedgerX, a crypto derivatives provider, was the first to cut ties with Silvergate. Essentially, all these firms no longer accept payments through Silvergate and no longer use the bank to make payments.
In conclusion, Silvergate Bank’s voluntary liquidation is a significant event for the cryptocurrency industry. It highlights the need for cryptocurrency firms to conduct business with caution and for regulators to provide clarity to avoid similar incidents in the future.