Silvergate: The failure of a crypto-friendly bank is led by customers

The cryptocurrency crash has called for a new scalp. San Diego-based bank Silvergate is ceasing operations after a rush for deposits. This year’s mini-rally in digital token prices wasn’t enough to reassure customers and regulators, who were spooked by the collapse of FTX, one of Silvergate’s biggest customers.

The failure of Silvergate brings the disintegration of digital tokens into the regulated US financial system. It also breaks a golden streak for US banks. In 2022 and 2021, no bank backed by the Federal Deposit Insurance Corporation failed – an unusually long period.

The most recent collapse was Kansas-based Almena State Bank in late 2020. Its deposits totaled less than $69 million. As of December 31, Silvergates totaled more than $6 billion. It is likely to be among the 50 largest US bank failures tracked by the FDIC.

Go back a decade and Silvergate was a small real estate lender. When it started catering to crypto startups, its shares started rising with token prices. It became a major exchange point between dollars and digital tokens for crypto companies like FTX.

By 2018, Silvergate suggested that the addressable market for deposits related to digital currencies could be $40 billion. Average deposits peaked in early 2022 at nearly $15 billion.

Rising interest rates, falling crypto prices and official investigations into FTX led to disaster. The bank’s annual loss of nearly $1 billion last year dwarfed its net income for the past five years combined.

On some metrics, Silvergate was well capitalized. At the end of last year, it had a Common Equity Tier 1 capital ratio of 53.89 percent.

But the speed at which crypto prices spun and customers fled forced Silvergate to borrow and sell bonds at a loss. The leverage ratio has fallen from 8.29 percent in December 2020 to 5.1 percent – almost to the minimum.

Silvergate’s failure leaves crypto startups in a bind. For all their talk of disrupting traditional finance, they need banks. Tighter regulation and the chilling effect of Silvergate and FTX will mean few are willing to lend.

The Lex team is interested in hearing more from readers. Please let us know what you think of the rundown Silvergate in the comments below