Silvergate Capital Corporation, the holding company behind Silvergate Bank, this week announced the “voluntary liquidation” of the crypto sector’s favoured banking partner. The Californian bank, originally launched in 1988 as a regional savings and loans business before a 2013 pivot to providing banking and other financial services to crypto sector businesses. In 2016 it started offering services to private individuals holding crypto, such as crypto to fiat currency exchange services.

In 2019, Silvergate Capital launched an IPO that saw it raise $40 million at $12-a-share and list on the NYSE at a $223 million valuation. At its peak in late 2021, the company was worth almost $7 billion.

As one of only two established providers of banking services to the crypto sector and users, the other being the larger New York-based Signature Bank, Silvergate’s liquidation is a significant moment for a crypto sector that has had a bruising last several months.

The silver lining is that the bank’s voluntary liquidation will be a managed winding down with all client deposits returned. That’s a refreshing change from the recent pattern of scandal-ridden and disorderly crypto sector collapses, like that of the crypto exchange FTX a few months ago. FTX was a major Silvergate client.

However, Silvergate’s stated reason for the decision its bank no longer represented a viable going concern is significant. The press release highlighted “recent industry and regulatory developments”.

U.S. regulatory authorities have recently been targeting the crypto sector in a way that has led to concerns for its continued existence in the world’s largest economy. Many believe remaining companies will be forced offshore.

Why did Silvergate Bank decide to voluntarily liquidate?

Silvergate’s reason for entering voluntary liquidation is relatively simple – it has recently been losing money hand over fist. The company’s latest trading update in January showed the bank had lost $1 billion in a quarter after clients withdrew $8.1 billion as the crypto sector shuddered from the collapse of high profile companies like FTX and Genesis, a crypto lender that filed for bankruptcy in January.

A filing submitted on March 1^st to the Securities and Exchange Commission then outlined further deterioration in the bank’s financials due to:

“……the sale of additional investment securities beyond what was previously anticipated and disclosed in the Earnings Release primarily to repay in full the Company’s outstanding advances from the Federal Home Loan Bank of San Francisco. The Company sold additional debt securities in January and February 2023 and expects to record further losses related to the other-than-temporary impairment on the securities portfolio.”

It was clearly concluded there was no short-term prospect of the business environment for a bank focused on the crypto sector improving significantly enough to justify raising further capital to plug the holes. Or that anyone would be willing to hand over that capital at this time.

Earlier this month Silvergate Capital also shut down its Silvergate Exchange Network, which allowed crypto exchanges like Coinbase, Gemini, and Kraken to move money between themselves and other institutions, injecting valuable liquidity into the crypto ecosystem.

What does the downfall of one of the U.S. crypto sector’s 2 recognised banks mean?

If Silvergate’s demise, itself tightly linked to the struggles of some of its biggest clients, will lead to the downfall of more crypto companies remains to be seen. However, at the very least it is likely to represent a significant setback to the banking provisions available to the sector for the foreseeable future.

Banking and other services able to bridge the crypto and the mainstream financial sectors have always been a problem. But without that bridge, crypto companies and crypto holders are confined to a parallel existence which limits opportunities and growth.

Silvergate’s failure is likely to act as a disincentive to other banks engaging with the crypto sector in future. The Verge quotes Senator Sherrod Brown, chair of the Senate Banking, Housing and Urban Affairs Committee as stating “I’ve been concerned that when banks get involved with crypto, it spreads risk across the financial system and it will be taxpayers and consumers who pay the price.”

While Silvergate has pledged to wind itself down in an orderly fashion, returning all client deposits, its failure will not be viewed positively by U.S. regulators, who have recently been concertedly targeting the sector. The promise of intense scrutiny from regulators will act as further discouragement to anyone who might have considered filling the gap left by the liquidating bank.

There are also already fears of contagion. This week the share price of Silicon Valley Bank plunged by over 60%, wiping around $80 billion from its market capitalisation. One of the 20 largest banks in the USA, SVB services a number of the largest crypto-friendly VCs including Sequoia and Andreessen Horowitz.

The sell-off was sparked by a March 8 announcement by the bank it had sold $21 billion worth of its securities holdings for a $1.8 billion loss to shore up its balance sheet. It also raised $500 million from venture firm General Atlantic and is seeking to raise another $1.75 billion through a stock placement, for a total of $2.25 billion.

The bank has assured investors it is well-capitalised with “one of the lowest loan-to-deposit ratios of any bank of our size” and expects to reinvest the capital from the sale into “more asset-sensitive, short-term” securities. However, there was also a warning that could change in the event of a run on the bank:

The Information, a tech sector media, reports SVB chief Greg Becker told investors to “stay calm” and said the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge.”

Cryptocurrency prices have also slumped this week with Bitcoin dropping below $20,000 at one stage from over $22,500 on Wednesday before recovering to $20,190 at the time of writing.

Source: CoinMarketCap

What happens next?

Crypto sector advocates are convinced the industry is now big enough to weather the storm of one bank exiting the scene, even if there are few alternatives. On Thursday, New York-based Signature Bank (SBNY) said it retains a “strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.”

A larger bank than Silvergate with $114 billion of assets under management compared to Silvergate’s $11 billion, Signature Bank provides deposit services for its clients’ digital assets. However, it does not invest in, does not trade, does not hold on its own balance sheet or provide custody of digital assets, and does not lend against or make loans collateralized by such assets, according to a statement issued this week.

The biggest fear is that regulatory scrutiny may lead other U.S. banks to withdraw from the crypto sector entirely. This week the crypto exchange Gemini Trust was forced to deny that JPMorgan is ending its banking relationship with the company, stating “Gemini’s banking relationship remains intact with JPMorgan.”

One of the most significant developments for the crypto sector in recent years has been the progress made by companies in their efforts to gain legitimacy through integration with the mainstream financial sector. Silvergate’s collapse puts that progress under threat. How big the threat is will become clear over the next few weeks and months.