La Jolla’s Silvergate Bank to close because of crypto losses

La Jolla-based Silvergate Bank, which grew fast by catering to cryptocurrency traders, said March 8 that it is winding down operations and will liquidate amid mounting losses, customer defections and regulatory pressure.

The bank’s parent company, Silvergate Capital, announced after markets closed that it had voluntarily decided to cease operations as the “best path forward” given its deteriorating situation.

Bloomberg News reported late the day before that officials of the Federal Deposit Insurance Corp. were at the bank’s headquarters in an effort to salvage the institution, but that apparently was not a viable option.

The news sent Silvergate’s stock tumbling nearly 40 percent in after-hours trading to $3.17 cents a share. That’s down from a high of $158 per share about a year ago during the height of the cryptocurrency boom.

The bank’s parent first raised red flags about its future last week in a filing with the U.S. Securities and Exchange Commission. It revealed that it risked becoming “less than well-capitalized” and was evaluating its ability to stay in business amid continuing losses.

Now, the company said it is working on a liquidation plan that includes “full repayment of all deposits.” It did not mention bankruptcy.

Silvergate also is trying to figure out the best way to resolve claims and preserve the value of its remaining assets, including its proprietary technology and tax assets. Those assets could include a stable-coin digital currency that it acquired from Facebook parent Meta last year but never launched, as well as the technology behind the Silvergate Exchange Network, which allowed institutional traders to transfer U.S. dollars among various crypto exchanges in real time daily.

Led by Chief Executive Alan Lane, Silvergate tailored its business toward providing deposit accounts, fund transfers, a real-time payments network and other banking infrastructure to the cryptocurrency industry.

It was wildly successful during the crypto boom coming out of the COVID-19 pandemic. But high-profile bankruptcies in the industry, especially the collapse of crypto exchange FTX and subsequent criminal fraud charges against FTX founder Sam Bankman-Fried, sent Silvergate’s finances into a tailspin.

Silvergate suffered a run on deposits after the collapse of FTX last fall. It lost $1 billion in the fourth quarter alone when it had to cover deposit withdrawals by selling debt securities earlier than planned. It also laid off 181 workers locally to trim expenses, including its chief credit officer and chief anti-money laundering and sanctions officer.

Last week, the bank disclosed that losses continued in January and February. The news led crypto-trading customers to publicly distance themselves from Silvergate, including Coinbase, Paxos Trust and Bitstamp, among others.

On March 3, the bank shut down its Silvergate Exchange Network, a key service the bank provided to its digital currency customers.

Silvergate also faced increased regulatory scrutiny. A group of U.S. senators led by Elizabeth Warren (D-Mass.) is probing why Silvergate’s anti-money laundering and Bank Secrecy Act compliance programs failed to red-flag improper transfers related to FTX’s collapse.

In January, three top U.S. banking regulators — the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency — warned financial institutions of the high liquidity risks associated with crypto-asset deposits. The agencies pushed banks to perform “robust due diligence and ongoing monitoring” of crypto players with accounts at their banks.

Silvergate is a state-chartered bank under the supervision of the California Department of Financial Protection and Innovation.

DFPI Commissioner Clothilde Hewlett said the agency “is monitoring the situation closely to facilitate the safe and expeditious voluntary liquidation of Silvergate Bank. The department is evaluating compliance with all financial laws, as well as safety and soundness obligations, and is working closely with relevant federal counterparts.”

Centerview Partners has been hired as acting financial adviser during Silvergate’s wind-down period. ◆