Federal Reserve examiner claims that the cryptocurrency business was the main reason for the collapse of Silvergate Bank.

The U.S. crypto-friendly bank Silvergate is facing collapse due to its involvement with the failed cryptocurrency exchange FTX, as a capital run led to its closure. Federal Reserve inspectors have analyzed the situation and attributed the collapse to Silvergate's excessive reliance on cryptocurrency business in the past, as well as severe and negative nepotism among its management.

Editor's Pick: Crypto-friendly turned victim, can Silvergate survive after losing 9 billion?

Annual Disaster: Cryptocurrency Bank Silvergate Collapses

The Federal Reserve data shows that Silvergate was established in 1988 as an industrial loan bank, but its top management changed its business strategy in 2013 to focus primarily on cryptocurrency users.

It is reported that during its rapid rise, Silvergate's deposits grew from $1 billion in 2017 to $16 billion in 2021, a growth of over 10 times.

However, the rosy picture turned grim as it faced a crisis following the collapse of its largest client FTX, impacted by the overall panic and run on the cryptocurrency industry. After a tough struggle, Silvergate announced in March of this year that it would enter voluntary liquidation.

At the time, this incident became a focal point for some U.S. legislators, with some senators using this opportunity to criticize the state of the cryptocurrency industry, labeling it as a high-risk and unstable sector, and evenclaiming that banks involved in cryptocurrencies are putting the entire traditional financial system at risk.

As the bank of choice for crypto, Silvergate Bank's failure is disappointing, but predictable. I warned of Silvergate's risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole & regulators should step up against crypto risk.

— Elizabeth Warren (@SenWarren) March 8, 2023

Fed Inspectors Point Out Causes of Collapse

In the executive summary of the Federal Reserve's review of Silvergate's collapse on September 27th, the inspection team also identified the reasons behind it.

Poor Executive Capabilities and Rampant Nepotism

Firstly, the inspection team pointed out that the inefficiency of Silvergate's risk management capabilities and severe nepotism were the reasons leading to its voluntary liquidation.

The board and senior executives of Silvergate failed to keep up with the rapid growth, increasingly complex, and ever-changing risk situations of their bank.

They also found that there were almost familial relationships among the members of Silvergate Bank's senior management team. This nepotism undermined the bank's structure and risk management functions, making it unable to effectively address many of the risks at that time.

Overemphasis on Cryptocurrencies

Additionally, the inspection team explained that the high variability of deposit customers in cryptocurrency companies and the multi-layered financing risks were also among the reasons for the bank's collapse.

Silvergate Bank's business was mainly focused on the cryptocurrency industry, and most deposits were not protected by any insurance.

They believed that such concentrated business content was more susceptible to deposit runs, which was confirmed in November 2022 when Silvergate faced a liquidity crisis after a sharp drop in cryptocurrency asset prices.

Regulatory Oversight Negligence

Lastly, the inspection team also pointed out that government regulatory agencies were already aware of Silvergate's situation but did not require it to establish new risk protection measures.

Even though government regulatory agencies had expressed concerns about the bank's activities at the time, these activities should have been addressed through "stronger and more decisive regulatory actions."