It’s a fresh thunderclap for the cryptocurrency business. A catastrophe that has been developing for a few days has now jolted the fledgling financial services industry driven by blockchain technology.
Silvergate Bank, one of the few banks to embrace the crypto realm, has gone out of business due to its exposure to several crypto company bankruptcies since last summer.
According to a press statement on March 8, the firm announced its desire to wind down operations and voluntarily dissolve the bank in an orderly and in conformity with applicable regulatory processes.
Silvergate feels that, in view of recent industry and regulatory developments, an orderly wind-down of bank activities and voluntary liquidation of the bank is the best way forward. Silvergate informed investors on March 1 that the business is actively examining relevant regulatory and other inquiries and investigations pertaining to the company.
“The bank’s wind down and liquidation plan includes full repayment of all deposits. The company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets,” the spokesperson claimed.
According to Sheila Warren, CEO of the Cryptocurrency Innovation Council, this voluntary termination under California law involves returning funds to investors. There is no involvement of taxpayer funds or the FDIC.
The Federal Deposit Insurance Corporation (FDIC) is the guarantor for the bank’s depositors.
The bank’s demise resulted from regulatory pressure, particularly from the Department of Justice (DoJ), which began investigating its business relationship with former cryptocurrency kingpin Sam Bankman-Fried’s empire, which has been charged with twelve counts of fraud.
Authorities at the federal level have never officially charged Silvergate with any misconduct. Nevertheless, Reuters revealed last month that Binance, the largest cryptocurrency exchange in the world, has access to a bank account belonging to its US subsidiary Binance.US, in addition to FTX and sibling firm of FTX Alameda Research. And the bank holding that account was Silvergate Bank.
Executives from Binance moved hundreds of millions from this account to Merit Peak, a trading platform. Changpeng Zhao, the creator of Binance and a fierce opponent of Sam Bankman-Fried, served as the manager of Merit Peak.
Binance.US executives did not know about the money transfers at the time and learned about them after they were made, according to Reuters, which cites text messages between the CEO of Binance.US and a Binance executive.
The remittances began in late 2020. More than $400 million was transferred in the first three months of 2021.
Binance.US denied this information, stating in a tweet that “only Binance.US employees have access to Binance.US bank accounts.
The parent company did not comment.
The bank started courting cryptocurrency companies in 2013 when traditional banks were hesitant to do so because of the industry’s general secrecy. Hence, Silvergate emerged as the crypto bank.
When the company went public in 2019, it promised to completely focus on the sector, which was at the time going through a revival. Silvergate has $11.9 billion in digital assets held as deposits as of September 30.
But the bankruptcy of FTX and Alameda on November 11 scared customers away. Thus, as of December 31, the bank reported only $3.8 billion in digital assets held as deposits. FTX was one of Silvergate’s big customers. After the March 1 warning, Silvergate’s few remaining crypto clients also fled.
Coinbase, Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy Digital, and Gemini said on March 2 that they were suspending automated clearing house, or ACH, transfers and other business transactions with the bank. LedgerX, a provider of cryptocurrency derivatives, was the first to sever ties with Silvergate.
In essence, none of these businesses take payments through Silvergate anymore, and they don’t utilize the bank any longer.