Crypto-focused bank Silvergate Capital said on Wednesday it had fully repaid all remaining deposit liabilities. The development marks a milestone in the La Jolla, California-based firm’s decision to withdraw operations and voluntarily liquidate.
The bank, which caters to traders who trade cryptocurrencies such as Bitcoin, had flagged risks to its ability to continue operating earlier this month, fanning liquidity concerns that sparked a rout in the market. The company stated that “an orderly wind-down of bank operations and voluntary liquidation is the best path forward in light of recent industry and regulatory developments.”
Reuters reports that the bank now holds less than $10,000 in assets, which would mean the Federal Deposit Insurance Corp doesn’t insure any deposits made at the firm. The FDIC insures banks up to $250,000 per account. Silvergate, which was once a fast-growing firm that catered to investors in the cryptocurrency space, is one of the largest banks to fail since the beginning of the year. Its parent company first raised red flags in a filing with the Securities and Exchange Commission last week, saying it was evaluating its future.
The company said it had a liquidity shortage and faced pressure from investors to close accounts. Deposit withdrawals weighed down its balance sheet after the collapse of FTX, which sent investors rushing for the exits, leading to losses and a run on the bank. Silvergate reported a $1 billion loss in the fourth quarter as it sold assets to cover withdrawals. Major crypto-industry partners like Coinbase and Paxos cut ties with the firm, further straining its finances.
Silvergate, which also offers a mortgage warehouse business, has a reputation as an innovator in the cryptocurrency industry and is seen by some as a victim of regulatory uncertainty surrounding the market. But the firm’s losses have also drawn attention to issues arising from the volatile nature of the market and questions about how much supervision is needed for companies dealing with it.
Investors are still reeling from the crash of a well-known bitcoin trading platform that lost $800 million in value overnight, as fears about the market’s future have exacerbated. The selloff of e-currencies and other digital assets has slashed valuations across the sector, leaving many investors in negative territory.
Silvergate could have avoided the risk of failure by backing its non-interest-bearing deposit liabilities with central bank reserves backed by government money and earning interest. That’s what most experts call full-reserve banking, and it would have protected against both fair value losses and liquidity shortfalls. Instead, it relied on a combination of equity and debt financing to build up its assets, leaving it vulnerable. Ultimately, that strategy proved too risky for the firm. The move is a clear reminder of how important it is for regulators to ensure that they are keeping up with innovations in the rapidly developing financial technology sector.
