It's a new thunderclap that falls on the crypto industry.
A disaster that had been brewing for a few days and which has just shaken the young financial services industry, powered by blockchain technology.
Silvergate Bank (SI), one of the few banks to embrace the crypto sphere, is out of business, suffering from its exposure to the numerous bankruptcies of crypto firms since last summer.
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," it said in a press release on Mar. 8.
'Voluntary Liquidation'
It continued: "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’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."
According to Sheila Warren, CEO of the Crypto Council for Innovation, "this is a voluntary wind down under California law, which implies that they will be able to make depositors whole. Neither taxpayer money, nor the FDIC, are involved."
FDIC stands for the Federal Deposit Insurance Corporation, a guarantor for bank depositors.
The rout of the La Jolla, California-based bank, is due to pressure from regulators, in particular the Department of Justice (DoJ) which has opened an investigation into its business relations with the empire of the former crypto king Sam Bankman-Fried, charged with twelve counts of fraud. Bankman-Fried's empire consisted of bankrupt cryptocurrency exchange FTX and its sister company Alameda Research.
The firm "is currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company," Silvergate told investors on Mar. 1.
Federal regulators have never publicly accused Silvergate of any wrongdoing. But 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. The bank account was held at Silvergate Bank.
Binance executives transferred hundreds of millions from this account to a trading platform, Merit Peak. The manager of Merit Peak was Changpeng Zhao, the founder of Binance and a major rival of Sam Bankman-Fried.
At the time, Binance.US executives were unaware of these money movements and learned about them after they were made, according to Reuters, which cited text messages between the CEO of Binance.US and a Binance executive.
Money transfers started at the end of 2020. In the first three months of 2021, more than $400 million were transferred.
Binance.US dismissed the information, saying in a tweet that "only Binance.US employees have access to Binance.US bank accounts. Period."
The parent company didn't comment.
'Due Diligence Failures'
The information from Reuters immediately prompted many experts to say that this episode is reminiscent of FTX and Alameda Research.
FTX and Alameda Research were supposed to be independent, but according to the Department of Justice and the SEC, they maintained an incestuous relationship. Bankman-Fried is accused of transferring $10 billion of client funds from FTX to Alameda.
FTX was using the client cryptocurrencies as collateral to borrow money, which in turn it transferred to Alameda Research. Alameda used this money to invest in crypto businesses and also for trading operations.
On Mar. 1, Silvergate Bank warned investors that its survival was not guaranteed as the firm sold debt securities in January and February and expected to record further losses which could result in the bank being "less than well-capitalized."
"The company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements," the firm warned.
"The company is currently in the process of reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces."
A few days after these warnings, Silvergate shut down its Silvergate Exchange Network (SEN), a platform used by institutional investors to move money to cryptocurrency exchanges on a 24/7 basis. It was a game changer for crypto investors, because it allowed around-the-clock fund transfers between investors and crypto exchanges.
"As the bank of choice for crypto, Silvergate Bank's failure is disappointing, but predictable," blasted Senator Elizabeth Warren (D-Massachusetts), a fierce critic of Wall Street. "I warned of Silvergate's risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole & regulators should step up against crypto risk."
Silvergate was established in 1988. The bank initially specialized in lending to industrial customers and at the time also offered loans for both residential and commercial real estate.
Crypto Firms Abandoned Silvergate
In 2013, the bank began to court crypto firms, when traditional banks were reluctant to do so, due to the opacity prevailing in the sector. SIlvergate thus became the crypto bank.
In 2019, the firm made its IPO, 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.
But 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 (COIN), Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy Digital and Gemini all said on Mar. 2 that they would suspend automated clearing house, or 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.
