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

What is Silvergate Capital?

Silvergate Capital was a California-based community bank that started operations in the late 1990s. In 2013, it turned to cryptocurrencies to provide traditional financial services to crypto companies, including exchanges such as FTX, which filed for bankruptcy in November 2022. This was before other banks even thought of crypto, which inevitably made Silvergate an essential part of the whole cryptocurrency. industry.

One service Silvergate operates is the Silvergate Exchange Network, an instant payment platform that allows Silvergate customers to send US dollars to any Silvergate account, even when traditional banks are closed overnight and on weekends.

While the bank did not deal directly with cryptocurrencies, as withdrawals and deposits were made in fiat currencies, most of its clients traded with crypto, meaning it was hit hard when the crypto market collapsed last year. This included FTX, one of the largest crypto exchanges in the industry before filing for Chapter 11 bankruptcy.

What happened?

In just over a year, Silvergate Capital’s share price fell about 95% since its all-time high in November 2021. In March last year, investors were excited about Silvergate’s potential and the prospect that it might issue a stablecoin after it acquired assets purchased from Meta’s Diem, which was part of Meta Platform’s efforts to build a payment network.

Earlier this year, market makers loved Blackrock

BLACK

and Citadel announced an interest in Silvergate, at 7% and 5.5% respectively.

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

In January, a group of US 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 the traditional banking system.”

The bank faced multiple lawsuits accusing the company of failing to warn investors that it lacks the necessary protections needed to detect money laundering on the platform.

On Wednesday, the company finally said it is winding down operations and liquidating its bank, sending its share price plummeting more than 36% in after-hours trading.

“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of banking operations and a voluntary liquidation of the bank is the best way forward,” the bank said in a statement. “The bank’s run-down and liquidation plan includes full repayment of all deposits.”

The company has not spelled out how it plans to resolve claims against its company.

The price of Bitcoin

BTCUSD

and Ether

HE SAID

took a hit as a result of the news, but also because of a series of other events that happened this week.