Silvergate Bank Explained

Silvergate Bank
Type:Public
Hq Location City:La Jolla, San Diego, California
Hq Location Country:U.S.
Founders:Dennis Frank and Derek J. Eisle (1996 re-capitalization)
Defunct:2023 (announced winding down)
Fate:Voluntary liquidation
Area Served:Worldwide

Silvergate Bank was a California bank founded in 1988. The company began providing services for cryptocurrency users in 2016, and conducted an IPO in 2019. In November 2022, concerns were raised about Silvergate's health, after a fall in cryptocurrency prices and the bankruptcy of FTX. In March 2023, the bank announced plans to wind down and liquidate.[1] Its failure was one of the first in the 2023 United States banking crisis.

Foundation and growth

Silvergate Bank was founded as a savings and loan association.[2] [3] In 1996, it was re-capitalized and reorganized into a bank by Dennis Frank and Derek J. Eisele, but it initially remained a three-branch community bank in the San Diego region.[4]

In 2013, CEO Alan Lane personally invested in Bitcoin; the company launched an initiative to start serving cryptocurrency clients in 2016.[5] After this, the bank grew rapidly, reaching $1.9 billion in assets and 250 clients by 2017. The company conducted an IPO in November 2019 at a share price of $13, and by November 2021 the price had risen by 1,580% to $219 due to the cryptocurrency bubble at the time.[6]

Silvergate Exchange Network and Diem acquisition

The bank operated a real-time payments system called the "Silvergate Exchange Network" (SEN), which enabled cryptocurrency exchanges, institutions, and customers to exchange fiat currencies such as US dollars and euros.[7] [8] Silvergate was probably the first regulated bank to develop this sort of payment system. By the third quarter of 2022 it had $12 billion in deposits from 1,677 "Silvergate Exchange Network" (SEN) customers including all major cryptocurrency exchanges and over 1,000 institutional investors.

In 2021, Silvergate initiated efforts to launch its own U.S. dollar-backed stablecoin,[9] acquiring Meta's Diem technology in January, 2022 for around $200 million to assist with this (Silvergate had previously intended to serve as a key issuer of the Diem currency for Meta).[10] [11] As of late 2022, the stablecoin had not yet launched.

By this time, the bank was led by Lane as CEO and Ben Reynolds as president, while Eisele remained in the leadership as chief credit officer.[12] [13]

FTX exposure, drop in liquidity, and winding down

See also: Bankruptcy of FTX. In late 2022—following a fall in cryptocurrency prices and the collapse of many cryptocurrency exchanges and schemes such as FTX—concerns were raised about potential effects on Silvergate due to loss of deposits and credit exposure from SEN leverage, as well as potential ramifications of issues for the wider cryptocurrency ecosystem due to Silvergate's key role in it.[14] [15] [16] Some short sellers raised the prospect of a bank run. The share price of Silvergate had fallen 89% from its November 2021 all-time-high to $25 by 5 December 2022, and its deposits fell to $9.8 billion. Silvergate reported that it had adequate liquidity, that it only held FTX deposits, and that it was not exposed to FTX via lending. Senators Elizabeth Warren, Roger Marshall, and John Kennedy requested that the bank explain its relationship to FTX in December 2022.[17] By December 2022 deposits at Silvergate had fallen to $3.8 billion.[18]

On March 8, 2023, it was announced that Silvergate Bank would wind down its operations and liquidate.[1]

Notes and References

  1. Web site: Church . Steven . Silvergate Slides on Plan to Wind Down Bank Operations and Liquidate . . 8 March 2023 . en . 8 March 2023.
  2. Web site: Cheng . Kate Rooney, Evelyn . Meet the small community lender that's become the go-to banker of the cryptocurrency world . 20 November 2022 . CNBC . May 31, 2018 . en.
  3. Web site: Silvergate Bank . 20 November 2022 . banks.data.fdic.gov.
  4. Web site: Biography - Derek Eisele - School of Business - University of San Diego . 20 November 2022 . www.sandiego.edu.
  5. Web site: Monica . Paul R. La . 22 February 2021 . This bitcoin bank's stock has jumped nearly 1,300% in just over a year CNN Business . 20 November 2022 . CNN . en.
  6. Web site: Silvergate Capital Corporation (SI) Stock Price, News, Quote & History - Yahoo Finance . 20 November 2022 . finance.yahoo.com.
  7. Web site: Berkowitz . Bram . 17 November 2022 . Is Silvergate Capital Facing a Bank Run? . 20 November 2022 . The Motley Fool . en.
  8. Web site: Rossolillo . Nicholas . 20 October 2022 . Silvergate Capital Defies the Odds and Increases Its Crypto Client Base in Q3 2022 . 20 November 2022 . The Motley Fool . en.
  9. Web site: Berkowitz . Bram . 21 October 2022 . After Another Delay, Is Silvergate Capital's Planned Stablecoin Now Dead in the Water? . 20 November 2022 . The Motley Fool . en.
  10. News: Hoffman . Peter Rudegeair and Liz . WSJ News Exclusive Facebook's Cryptocurrency Venture to Wind Down, Sell Assets . 20 November 2022 . Wall Street Journal. January 27, 2022 .
  11. News: Baker . Liana . Hamilton . Jesse . Kharif . Olga . January 25, 2022 . Mark Zuckerberg's Stablecoin Ambitions Unravel With Diem Sale Talks . Bloomberg.com . 20 November 2022.
  12. Web site: Silvergate CEO reassures users after FTX fallout . 20 November 2022 . CNBC . en.
  13. Web site: Silvergate announces changes to its executive team . 20 November 2022 . finance.yahoo.com. November 7, 2022 .
  14. Web site: Benoit . David . 20 November 2022 . Crypto Bank Silvergate Battles FTX Contagion Fears . 20 November 2022 . Wall Street Journal.
  15. Web site: Shares of Crypto Bank Silvergate Continue to Fall Despite CEO's Remarks . 20 November 2022 . news.yahoo.com. November 18, 2022 .
  16. News: Reyes . Mark . November 18, 2022 . Silvergate Capital Shares Slide as FTX Fallout Attracts Short Sellers . Bloomberg.com . 20 November 2022.
  17. News: Turner . Matt . 6 December 2022 . Crypto Bank Silvergate Asked by US Senators to Explain FTX Ties . Bloomberg . 8 December 2022.
  18. News: Saini . Manya . Nishant . Niket . Lang . Hannah . January 5, 2023 . Silvergate Capital shares sink as crypto-related deposits plunge . . 5 January 2023.

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