Silvergate: Another fall from the CeFi house of cards

After months of reeling from FTX’s downfall, Silvergate Capital has announced its voluntary liquidation. 

“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of Bank operations and a voluntary liquidation of the bank is the best path forward,” representatives said in a statement. 

Silvergate served as one of the major banks for crypto companies, providing banking services, once upon a time, to the likes of Coinbase, Binance, Circle, and FTX and growing from a small community bank to a force to be reckoned with in the crypto landscape. They touted themselves as a regulated way for the crypto industry to access banking.

Alan Lane
Alan Lane, CEO of Silvergate

“We’ve got all of them,” said CEO Alan Lane in June 2022. “All of the major ones. Anybody serious about regulation.”

Unfortunately for Silvergate, their dealings with FTX had other customers spooked, resulting in a  withdrawal of 68% of deposits in Q4 2022. To cover the bank run, the bank sold $5.2 billion of debt securities, creating a loss on sale of $718 million.

“In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure that we were maintaining cash liquidity to satisfy potential deposit outflows, and we currently maintain a cash position in excess of our digital asset-related deposits,” stated Lane at the time. 

However, some say its problems reached far beyond the crypto industry’s recent woes. 

A casualty of FTX’s ‘ripples’

The bank’s involvement with FTX is seen as the primary instigator of Silvergate’s eventual collapse. 

FTX and Alameda Research were long-time customers of Silvergate, and the bank is said to have often used their ties as a source of endorsement. Their apparent intertwining brought the regulatory scrutiny of Sam Bankman-Fried’s empire right to the bank’s doorstep. 

In a letter to Lane on Jan. 30, 2023 (following a first communication that was deemed “insufficient”), regulators demanded the bank’s assistance in understanding the “significant due diligence” that Silvergate had claimed to have undertaken. 

In response to Silvergate’s initial reply to the investigation, the letter read, “They reveal that Silvergate had risk management and due diligence processes in place – but that they did fail miserably…The remainder of your letter did not provide the additional information we requested – information that Congress needs to understand how and why these failures occurred.”

US Senator Elizabeth Warren
US Senator Elizabeth Warren was one of the signatories of the letter to Lane.

Silvergate had referred to “confidential supervisory information” as a justification for an inability to provide regulators with the requested information. 

The regulators’ January response insisted, stating, “Both Congress and the public need and deserve the information necessary to understand Silvergate’s role in FTX’s fraudulent collapse, particularly given that Silvergate turned to the Federal Home Loan Bank as its lender of last resort in 2022.”

The public lack of clarity has not worked in the company’s favor, and as a result, more exchanges announced cutting ties with the bank. Prominent names that Lane had boasted as clients publicly dropped like flies. 

A way out was becoming increasingly unclear for Silvergate, already in the throws of dwindling deposits and dismal results. 

January 2023 came with a cut of 40% of their workforce and a discontinuance of the company’s mortgage warehouse lending business. 

Silvergate then ruffled feathers announcing their inability to keep to the March deadline of their audited annual 10k filing, citing a need to complete audit procedures and “currently analyzing certain regulatory and other inquiries and investigations.” The company hinted at concerns about the continued operation of the business. 

The Silvergate Exchange Network (SEN), which had become a major infrastructure for crypto institutions, allowing them to transact in dollars 24/7, was the latest thing to go, the announcement appearing as a quiet banner on the company website earlier this month. 

This quiet defeat set the stage for yesterday’s announcement of voluntary liquidation, where Lane assured all deposits would be repaid in full. 

‘Not a crypto problem’ – Caitlin Long

Some use the news to push the “crypto crackdown” campaign further  

“As the impact of FTX’s collapse continues to ripple outward, today we are seeing what can happen when a bank is overreliant on a risky, volatile sector like cryptocurrencies,” said Senate Banking Committee Chairman Sherrod Brown. 

“I’ve been concerned that when banks get involved with crypto, it spreads risk across the financial system, and taxpayers and consumers will pay the price.”

To this, Custodia Bank CEO Caitlin Long responded in a tweet, citing that the problem lay within the bank’s actions rather than the cryptocurrencies themselves. 

She referenced Silvergate’s balance sheet, highlighting that on March 31,  just over $13 billion lay in demand deposits, while cash and cash equivalents were held at just $1.4 billion. 

“When a bank with highly volatile deposits makes a levered investment in 10-year bonds into a Fed tightening cycle, what happens when a bank run hits are predictable—liquidate those bonds at a loss, impairing the bank’s capital. It’s an indictment against fractional-reserve banking,” she continued in a thread. 

To those who replied, “no bank currently holds all the reserves equal to the amount clients hold in deposits,” Long said that the Fed had rejected Custodia Bank’s proposal.

Her opinion has sparked an ongoing Twitter debate where sifting through unnecessary attempts to school Long that “that’s just the way it is in banking.”

When dealing with such assets, which are volatile by nature, is the traditional way of banking (with all its propensity for fractional reserves) the right thing to be upholding?


  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.