Uncovering the truth behind Silvergate’s bankruptcy - who is behind it?

Author: Katherine Ross, Michael Mcsweeney, Blockworks; Translator: Tao Zhu, Golden Finance

Silvergate Bank’s parent company, Silvergate Capital, has filed for bankruptcy to end its business operations.

We’re getting our first glimpse into what led to the bank’s closure in 2023, and the circumstances are pretty grim.

In short: Despite the pressure, Silvergate did not fail, a person familiar with the matter tells us.

A filing from the parent company’s former CEO, Elaine Hetrick, supports this conclusion, writing that the sudden shift in regulators after FTX “suggested that, starting at least in the first quarter of 2023, federal banking regulators would not tolerate banks with a large number of digital asset customers, ultimately preventing Silvergate Bank from continuing its digital asset-centric business model.”

Also interestingly, Hetrick claims that Silvergate responded to the bank run that occurred in 2023.

She wrote: “Although Silvergate Bank had sufficient assets to repay its debts to depositors and had no lending or other business relationship with FTX other than holding deposits and servicing bank accounts, the perception of risk and fear of contagion (likely due to a series of cryptocurrency-related bankruptcy proceedings) led to a large withdrawal of deposits from Silvergate Bank.”

She added that Silvergate “acted decisively, first to stem the tide of bank runs during the industry crisis and then to liquidate Silvergate Bank in a manner that protected depositors from losses following a shift in regulatory approach.”

After the bankruptcy, a major claim was that Silvergate and its executives misled investors, an allegation made by the SEC in July when it took legal action against executives and the now-bankrupt bank.

“SCC, [former CEO] Alan Lane, and [former Chief Risk Officer Kathleen] Fraher misrepresented the operational and legal risks faced by the Bank by falsely stating in SEC filings and other public statements that the Bank had an effective BSA/AML compliance program specifically targeted at the elevated risks posed by its crypto-asset customers,” the SEC said.

Remember, the Federal Reserve blamed Silvergate’s crypto activities for its failure in a report last October.

But it seemed that Silvergate was, to all intents and purposes, complying with regulators until those regulators began taking a less friendly stance toward banks with high cryptocurrency concentrations.

Hetrick highlighted a joint statement from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency in January 2023, all of which raised potential concerns about banks involved in cryptocurrency activities.

The statement warned against allowing any "volatility" to migrate to the traditional banking system.

After the statement was issued, Silvergate attempted to restructure its business by ending its cryptocurrency custody business and laying off 200 people, according to Hetrick.

But it wasn't enough.

The same group of regulators continued the pressure in February, issuing another joint statement that mirrored the January statement.

“Following the rapid decline of Silvergate Bank’s business, Silvergate Bank has stabilized and is able to meet regulatory capital requirements and is in a position to continue to serve customers who have deposits with Silvergate Bank,” Hetrick stated, going on to explain:

“However, increasing regulatory pressures facing Silvergate Bank and other banks focused on servicing crypto-asset businesses have forced Silvergate Bank to reshape its business model, move away from crypto-asset businesses, seek to sell itself as a going concern under the shadow of regulatory pressure, or begin to wind down its business in an effort to preserve as much value as possible for its stakeholders.”

While there is currently no way to save Silvergate, the 132-page document paints a worrying picture — one in which regulators appear to have a bigger stake than FTX in Silvergate’s collapse. Or any of the now-bankrupt crypto lenders.