It's a collapse that will cost many investors dearly.
Californian bank Silvergate announced its failure on Mar. 8, confirming that its bet on the cryptocurrency industry had turned into a nightmare.
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.
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."
Silvergate (SI), which used to be known as the crypto bank, is the first U.S. bank to collapse since 2020, according to the Federal Deposit Insurance Corporation (FDIC), a guarantor for bank depositors.
Stock Fell by 44%
The announcement, made after the close on Wall Street, was followed by Silvergate shares tumbling nearly 44% to $2.76 in after-hours electronic trading. Silvergate's stock is down 72% this year, based on the Mar. 8 closing price of $4.91.
While Silvergate has indicated that it wants to return deposits to customers, it is unlikely that investors will get their investments back.
The fall of Silvergate impacted the cryptocurrency market, despite the fact that the latter was already prepared for this eventuality. Bitcoin prices fell 1.5% to $21,799.80 in the past 24 hours, while Ether prices fell 1.1% to $1,542.70, according to CoinGecko. Overall the crypto market was down 1.5% to $1.05 trillion.
The bank was where most of the big crypto firms went, because traditional banks did not want to do business with them, due to warnings from regulators who consider the crypto industry to be a risky sector.
"Silvergate demonstrates what can happen when a bank is overly exposed to one sector," said Sheila Warren, CEO of the Crypto Council for Innovation. "Discouraging banks from providing deposit accounts only exacerbates this problem by creating fewer options for any one sector to obtain banking services. The problem is not about crypto, but concentration risks."
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.
Silvergate's Fate Tied to FTX
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.
That day, the stock fell by nearly 58%.
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.
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 in custody.
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 in custody 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.
