Silvergate Bank's History and Financial Crisis

Silvergate Bank was founded in 1988 by Alan Lane, a former executive at Wells Fargo. The bank initially focused on serving the needs of the cannabis industry, offering banking services to businesses in the sector.

The bank's headquarters is located in La Jolla, California. Silvergate Bank's early success can be attributed to its innovative approach to banking, which catered to the unique needs of the cannabis industry.

In 2021, Silvergate Bank went public with an initial public offering (IPO), raising $725 million in funds. This move marked a significant milestone for the bank, allowing it to expand its services and reach a broader customer base.

Silvergate Bank was founded as a savings and loan association. It was re-capitalized and reorganized into a bank in 1996 by Dennis Frank and Derek J. Eisele. The bank initially remained a three-branch community bank in the San Diego region.

In 2013, CEO Alan Lane took a personal interest in Bitcoin, which marked a turning point for the bank. Silvergate Bank launched an initiative to serve cryptocurrency clients in 2016, and the bank grew rapidly as a result.

By 2017, the bank had reached $1.9 billion in assets and 250 clients.

Silvergate Bank was founded as a savings and loan association. It was later re-capitalized and reorganized into a bank by Dennis Frank and Derek J. Eisele in 1996.

The bank initially remained a small, three-branch community bank in the San Diego region. This was a humble beginning, but it laid the groundwork for the bank's future growth.

In 2013, CEO Alan Lane took a bold step by personally investing in Bitcoin. This move marked a significant turning point for the bank.

The bank's focus on cryptocurrency clients began to pay off in 2016, when it launched an initiative to serve this growing market. By 2017, the bank had grown rapidly, reaching $1.9 billion in assets and 250 clients.

The bank's success continued to soar, with its IPO in November 2019 taking the share price to $13.

Silvergate Bank had big plans for the digital currency space, and one key move was the acquisition of Meta's Diem technology in January 2022 for around $200 million.

This acquisition was a significant step towards launching Silvergate's own U.S. dollar-backed stablecoin. Silvergate had previously intended to serve as a key issuer of the Diem currency for Meta, but the acquisition allowed them to take control of their own stablecoin plans.

By acquiring Diem technology, Silvergate gained the tools it needed to launch its own stablecoin, which had not yet launched by late 2022. The bank was likely eager to get its stablecoin up and running, but it seems they needed a bit more time to make it happen.

In December 2022, Silvergate Bank's deposits had fallen to $3.8 billion, down from $9.8 billion earlier that year.

The bank's share price had already taken a hit, falling 89% from its November 2021 all-time-high to $25 by 5 December 2022.

Silvergate reported having adequate liquidity, but concerns about its exposure to FTX and the wider cryptocurrency ecosystem persisted.

On March 8, 2023, it was announced that Silvergate Bank would wind down its operations and liquidate.

By September 18, 2024, Silvergate Capital filed for Chapter 11 bankruptcy protection, listing assets between $100 million and $500 million and liabilities between $10 million and $50 million.

The bankruptcy was a result of 18 months of turmoil for Silvergate, a once crypto-friendly bank that shut down operations amid liquidity issues.

Silvergate's troubles began in March 2023 when the firm announced it would voluntarily liquidate its subsidiary, Silvergate Bank, citing challenges in the banking sector due to rising interest rates and the regulatory scrutiny following the collapse of the crypto exchange FTX in November 2022.

The SEC filed a lawsuit against Silvergate Capital in July, alleging that the bank helped facilitate fraud at FTX, but the Federal Reserve Board dropped all charges later that month.

Silvergate agreed to pay $63 million to settle charges with the SEC, the Federal Reserve, and the California Department of Financial Protection and Innovation (DFPI).

If you have exposure to cryptocurrency, you should review how the failures of Silvergate and Signature may impact your ability to exchange cryptocurrency for fiat currency. Firms should presume that cryptocurrencies are securities and act accordingly.

Regulators are cracking down on cryptocurrency, and it's essential to understand the implications. The SEC Chair Gary Gensler stated that very few cryptocurrency companies are actually registered with the SEC and fully compliant with federal securities laws.

You should evaluate whether there is transparency around any collateral backing stablecoins, as well as the extent to which that collateral may be subject to mark-to-market losses because of rising interest rates. This is especially important for investment advisers with client assets in stablecoins.

The failure of Silvergate and Signature has already led to increased volatility in the cryptocurrency sector. This is likely to continue as cryptocurrency exchanges and investors look for alternative avenues to support capital flows.

Here are some key takeaways to keep in mind: