A small unknown credit union in California has emerged as a key banking partner for the biggest players in the US cryptocurrency industry, but the success of Silvergate Bank appears to have been cut short by the collapse of the FTX exchange and the resulting mistrust in the sector.
The largest "crypto-bank" in the world is now struggling, with customer withdrawals of over $8 billion following the FTX disaster forcing Silvergate to its knees. Losses in the high triple-digit millions and the dismissal of 200 employees (40%) have resulted in the total net income over two decades being wiped out in a single quarter. Here is an overview of the rise and fall of this unknown giant.
Former innovator in the field
Founded in 1988 as a small credit bank in San Diego, Silvergate gradually built up a customer base over the years while remaining relatively loyal to its original business. The turning point for Silvergate Bank came in 2013, when the credit institution officially shifted its focus to the emerging cryptocurrency banking sector. As a number of newly established cryptocurrency firms competed for banking relationships, Silvergate cleverly filled the gap with its own network of banks. Through the Silvergate Exchange Network (SEN), institutional customers can instantly transfer dollars between various cryptocurrency exchanges and bank accounts, with the service available 24/7 rather than during traditional banking hours.
An attractive offering for cryptocurrency institutions, by 2019 the bank had grown its managed assets to over $2 billion, spread across around 500 customers. However, it was Silvergate's initial public offering in 2021 that really took the credit institution to new heights, as the exponential surge in demand for cryptocurrencies and related services saw its customer base soar to 1,300 and its managed assets reach nearly $16 billion by the end of the year. Its clients included major US cryptocurrency exchanges such as Coinbase Global and Gemini, as well as Sam Bankman-Fried's FTX and Alameda Research.
A deadly quarter for Silvergate
Last week, preliminary financial figures for the fourth quarter revealed troubling developments for the bank. Total cryptocurrency customer deposits collapsed from almost $12 billion to $3.8 billion within three months. According to the press release, the cryptocurrency crash triggered a rush on Silvergate deposits. Forced into a liquidity crisis, the bank had to sell securities to cover a loss of $718 million and lay off 40% of its workforce.
In the preliminary report, Silvergate explained that significant over-indebtedness in the industry had led to several high-profile bankruptcies, resulting in a loss of confidence among market participants and a withdrawal of funds from the sector. The bank also pointed to the volatile nature of cryptocurrencies as a contributing factor to the crisis. It remains to be seen how Silvergate will recover from this blow, but for now, the future looks bleak for the once-mighty "crypto-bank". According to three US senators, Silvergate played a crucial role in Bankman-Fried's $10 billion fraud. Whether or not it was responsible, the collapse of the stock exchange is likely to have contributed significantly to the bank's Q4 figures.
The future looks uncertain for Silvergate
It is unclear how Silvergate will bounce back from this blow, but for now, the future looks bleak for the once-mighty "crypto-bank". The bank's management has stated that it will continue to focus on its core business and will work to strengthen its balance sheet in the coming quarters. However, the damage caused by the FTX collapse and the resulting mistrust in the sector may be difficult to overcome. As the cryptocurrency industry continues to evolve and mature, it remains to be seen whether Silvergate will be able to reclaim its position as the leading player in the space.
"The company is committed to maintaining a highly liquid balance sheet with a strong capital position. Silvergate has structured its business to support its customers not only during times of growth, but also during times of volatility. The business is designed to absorb inflows and outflows of deposits under a range of market conditions. Despite significant turbulence in the industry, Silvergate is prepared to support its customers in the digital asset space." - Press Release Silvergate
