Silvergate Capital Declares Bankruptcy, Finalizing Its Crypto-Driven Collapse

Silvergate Capital has filed for bankruptcy to close its operations, marking the final chapter for the parent company of Silvergate Bank, Reuters reported. The La Jolla-based institution shut down operations earlier in 2023 following a crippling run on deposits caused by the chaos in the digital asset market.

Bankruptcy and Liquidation

Silvergate is set to use its remaining $163 million to settle with creditors. The bank's deposits rose from $1.8 billion in 2019 to $14.3 billion by 2021, with over half of these deposits coming from digital asset exchange customers.

However, this rapid expansion came with its risks. The collapse of major crypto players like FTX in 2022 caused massive withdrawals from the bank, over $8 billion, forcing it to sell long-term securities at a loss to meet customer demands.

Silvergate Capital had no choice but to file for bankruptcy in Wilmington, Delaware, aiming to complete its liquidation. The remaining cash, approximately $163 million, will reportedly be distributed among bondholders and preferred equity holders.

According to the bankruptcy filings, bondholders owed $18 million are expected to be repaid in full. Silvergate maintains that it didn't fail in the traditional sense, pointing out that all customer deposits were returned, leaving no burden on the Federal Deposit Insurance Corporation.

Market Volatility and Regulatory Scrutiny

The downfall of Silvergate wasn't solely due to market volatility. The bank also faced intense scrutiny from regulators following the 2022 crypto collapse. In 2023, Silvergate agreed to pay $63 million to settle investigations by the Federal Reserve, California's bank regulator, and the U.S. Securities and Exchange Commission (SEC).

The probes found that the bank had deficiencies in its monitoring of anti-money laundering compliance and that it, along with its executives, had made misleading statements. These legal battles compounded Silvergate's financial troubles, making it harder for the bank to recover.

In July, Finance Magnates reported that Silvergate Capital and its top former executives agreed to pay a total of $63 million as penalties to settle charges brought by federal and California regulators alleging internal management and disclosure failures. The allegation also included dealing with the now-collapsed crypto exchange FTX.

California’s Department of Financial Protection & Innovation imposed a civil penalty of $20 million against the company, while the Federal Reserve Board fined the firm $43 million. Besides that, the SEC imposed a $50 million fine, which was reportedly offset by other penalties.