Why Silvergate’s Crypto Business Was Destined to Fail

The bank’s data shows that its novel crypto-banking business has rapidly accelerated, and how leaning into digital assets made the bank vulnerable to the industry’s drama.

Why Silvergate's Crypto Business Was Destined to Fail

Silvergate Bank was one of the first banks to offer services to cryptocurrency companies, and as the industry exploded in popularity in late 2017, the bank’s deposits from crypto companies skyrocketed. But as the industry crashed in late 2022, Silvergate’s core block of business crumbled, and the bank lost more than $8 billion in deposits from its crypto customers. This was exactly what the bank’s regulators had predicted might happen for such institutions.

The sudden evaporation of its deposit base was only one of several concerns for the La Jolla, California-based lender. The company has faced pressures from U.S. banking watchdogs that have been insisting that banks shouldn’t concentrate on crypto, and its disclosures this week revealed investigations from regulators and the U.S. Department of Justice. In addition, its auditor has suggested that the company may need to restate its financials.

Apart from all that, its one-time crypto strengths have been starting to drag it down, according to a CoinDesk analysis of the bank’s financial reports over the past several years.

The Silvergate Exchange Network saw its highest volume in the first half of 2021, with $406 billion in transfers. However, this number decreased to $230 billion by the second half of 2022, revealing that the institution may have peaked in 2021.

And the bank’s overall asset size also reached a high point in the fourth quarter of 2021, increasing by $4.6 billion to $16 billion. Its most recent report showed it at $11.4 billion.

Despite its outsized reputation as a key player in the digital assets industry, the scale of this bank’s assets is very small – comparable to a mid-sized community bank. In California, a slightly larger bank would be Farmers and Merchants Bank of Long Beach.

Silvergate Bank is different from other Long Beach community banks in one key way: their capital. The crypto bank rapidly slid into the final quarter of 2022 to a so-called leverage ratio that revealed they only had 5.4% of capital against their overall assets. In the same quarter at the latter bank, they reported a ratio of 10.9%.

U.S. bank capital rules state that 5% is the edge of the cliff, beyond which a bank descends below a “well-capitalized” designation and toward the territory of emergency intervention from regulators.

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