Silvergate Capital files for bankruptcy, relying on the closure of a bank serving the cryptocurrency industry

Silvergate Capital, the parent company of Silvergate Bank, which was once known as the cryptocurrency-exclusive bank, has officially filed for bankruptcy, marking the final step towards the company's closure. Following the closure of Silvergate Bank in 2023, the bank shut down due to the turmoil in the cryptocurrency industry. Silvergate filed for bankruptcy in Delaware, planning to wind down operations and distribute remaining assets to creditors.

The Rise and Fall of Silvergate Bank

Based in California, Silvergate Bank once played a crucial role in the cryptocurrency industry, serving numerous clients involved in digital assets. However, due to a sharp decline in the digital asset market, the bank was forced to cease operations in March 2023 as customers began withdrawing their deposits, causing a liquidity shortage that made it impossible to sustain business.

Following the closure, Silvergate refunded all deposits to its clients, ending the process with approximately $163 million in cash, which is intended to be distributed to stakeholders during the bankruptcy proceedings.

Federal Reserve examiners point to the cryptocurrency business as the primary reason for Silvergate Bank's collapse.

Bankruptcy Plan: Who Will Be Repaid?

Silvergate Capital's bankruptcy filing outlined the plan to liquidate remaining assets and repay creditors. According to the company, bondholders are owed $18 million and are expected to be fully repaid. Additionally, the company plans to make payments to preferred stockholders. However, common stockholders may not receive any repayment as the remaining funds of the company may have been depleted before paying other creditors.

Victims of the 2023 U.S. Banking Crisis

Silvergate's collapse was one of several high-profile bank failures that rocked the U.S. banking system in 2023. Apart from Silvergate, other notable closures included Silicon Valley Bank, First Republic Bank, and Signature Bank. These banks, including Silvergate, fell into a broader financial crisis due to the weakness in the cryptocurrency market and declining investor confidence.

From Rapid Growth to Sudden Collapse

The rise and fall of Silvergate Bank were dramatic. With the booming cryptocurrency market, the bank's deposits surged from $1.8 billion at the end of 2019 to $14.3 billion by the end of 2021. According to court documents, 58% of the deposits in 2021 came from customers of digital asset exchanges.

However, with several major cryptocurrency companies collapsing in 2022, the situation took a sharp downturn. The collapse of FTX and failures of other cryptocurrency firms had a ripple effect on the industry, leading to customers of Silvergate withdrawing over $8 billion in deposits. To meet these withdrawal demands, Silvergate was forced to sell long-term debt securities at a significant loss, accelerating its collapse.

Silvergate Incident Draws Regulatory Scrutiny

Silvergate's woes were compounded by increasing regulatory pressure. With the comprehensive collapse of the cryptocurrency market in 2022, U.S. regulatory agencies intensified their scrutiny of digital asset-related institutions, making it increasingly challenging for Silvergate to sustain its business model.

In 2023, Silvergate agreed to pay $63 million to settle investigations by the Federal Reserve System, the California banking regulators, and the U.S. Securities and Exchange Commission (SEC). Regulators found deficiencies in the bank's compliance with anti-money laundering (AML) laws, while the SEC accused Silvergate and its executives of making misleading statements regarding the bank's financial health and regulatory compliance.

Silvergate's Defense: Bankruptcy Not Due to Mismanagement

Despite the bankruptcy, Silvergate maintains that its failure was not due to poor financial management but rather external market conditions. According to bankruptcy court documents, the company emphasizes that Silvergate Bank did not "fail" in the traditional sense. As per these documents, the bank successfully repaid all customer deposits without causing any burden on the Federal Deposit Insurance Corporation (FDIC). This distinction is crucial for Silvergate as it strives to salvage its reputation while dealing with remaining debts and undergoing bankruptcy proceedings.

Warning: The Consequences of Overconfidence in Cryptocurrency

For many in the financial industry, Silvergate's collapse serves as a warning of the dangers of overreliance on volatile markets, especially in young and unpredictable markets like cryptocurrency. As regulatory bodies continue to tighten control over the cryptocurrency industry, the future of such institutions remains uncertain, and Silvergate's bankruptcy provides a thought-provoking lesson for businesses looking to profit in the blockchain space.