Silvergate was originally a small American bank, operating as a savings and loan provider. In 2016, it launched an initiative to serve clients in cryptocurrencies. It then began to grow rapidly and by 2017, the assets under management had grown to $1.9 billion and the number of clients to 250. In November 2019, it became a publicly traded company. When it went public, one of its shares cost $13, but in 2 years it has climbed to $219. That’s an increase of 1,580%.
Silvergate became pivotal for the world of cryptocurrency companies because it was the first regulated bank to offer clients a real-time settlement payment system, the Silvergate Exchange Netwrok (SEN). Due to the relative speed of transactions achieved on the SEN network, a large number of cryptocurrency companies have set up accounts with the bank. As of the third quarter of 2022, SEN had $12 billion in deposits from 1,677 customers, including all major cryptocurrency exchanges and more than 1,000 institutional investors.
Despite conducting the majority of its trades with cryptocurrency companies, Silvergate’s own investment portfolio was relatively conservative; a large portion consisted of mortgage-backed securities as well as U.S. Treasuries. But this apparent bet on safety later led to its downfall. These types of assets, although reliably repaid in full up to maturity, carry risks associated with changes in interest rates. When interest rates shot up during the inflationary wave of 2021-2023, the market price of these securities fell significantly. If these losses are unrealized, it usually does not cause major problems because the bank will receive payment in full according to the original terms of the bond. If, however, it is forced to sell these securities at a lower market price, as Silvergate did, this is already happening as part of some sort of crisis situation because the losses on these types of assets are being realized. This type of divestment is a signal that the bank is in danger.
Silvergate was hit with a run as a result of the FTX crypto exchange bankruptcy. FTX’s own deposits consisted of around 10% of all deposits in the bank. However, the panic subsequently led to the withdrawal of 68% of the assets it had under management. And because Silvergate did not have enough cash to satisfy the deposit withdrawals, it was forced to sell its assets at a large loss. Silvergate faced severe financial constraints in the following months, continued to sell assets at a loss, and had to borrow $3.6 billion from the Federal Home Loan Bank of San Francisco to provide liquidity.
On March 1, Silvergate announced that it would miss the deadline to file its annual report with the SEC. Their losses turned out to be greater than the $887 million they recorded in Q4 2022. After the announcement of the delay in the SEC filing, Silvergate’s stock plunged 10% that same day, and by the end of the next day it was down another 58%. Their price thus reached an all-time low.
The Coinbase exchange subsequently announced that it would stop using Silvergate for dollar payments from financial institutions and switch to Signature bank (which would go bankrupt just a week later). One of the largest rating agencies, Moody’s, downgraded SI stock. It did so for the second time in 2 weeks. Following Moody’s announcement, prominent crypto firms such as Circle, Blockchain.com, Galaxy Digital, Wintermute, GSR and Paxos terminated their relationships with Silvergate. Trading platform SEN has ceased operations.
Faced with continued losses from the sale of securities at market price, Silvergate issued a public announcement on March 8, 2023 that it would undergo voluntary liquidation. It has submitted a plan showing how it will return all deposited funds to their respective owners. Silvergate is facing investigations by the U.S. Department of Justice and banking regulators. Silvergate’s demise could mean, especially for retail customers, that it will soon be unattainable to buy crypto with fiat currencies. The end of Silvergate could thus push the crypto industry up to 10 years into the past.