Before Silvergate and After Silvergate

Earlier this year, American Banker reported that two of the principal banks friendly to the U.S. crypto industry, Silvergate and Signature, took out loans from a federal program originally set up to back mortgage lending. This was a painful thing to learn in some corners of the crypto industry. They remember that when Satoshi Nakamoto released the codebase for Bitcoin in 2008 it was as much a political statement as a technical revolution. Before cryptocurrencies were even called “crypto currencies,” the understanding was this alternative financial system would play by predefined rules: No bailouts.

Of course, not everyone was upset to learn Silvergate, important for getting dollars into the crypto economy, took out this Federal Home Loan Bank. Banks are banks, after all. But few will be happy to hear that Silvergate looks set to fail – even if it seems karmic. Today, the bank announced it was delaying a Securities and Exchange Commission filing for the first time, after it made last-minute asset sales to repay an outstanding balance on its federal loan. The company lost $1 billion in the fourth quarter of 2022 alone, a figure that may be revised higher, and still has additional loan repayment obligations – meaning it may soon be “less than well-capitalized,” a Silvergate filing said.

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Betting when a company will fail is a notoriously difficult thing to do – often best left to professional investors. Even though Silvergate’s own projections are grim, the situation can change. It does not, however, bode well that companies including crypto exchange Coinbase are said to be switching banking partners to Silvergate’s primary competitor in the crypto industry, Signature. In January, one of the crypto industry's most visible and influential investors, Ark Invest’s Cathie Wood, shed 99% of her company’s Silvergate holdings from its disruption-focused investment fund. A majority of Silvergate’s shares are sold short, including a million-dollar-plus position taken out by billionaire trader George Soros’ hedge fund.

Silvergate’s problems come amid a regulatory backlash against crypto, one particularly interested in minimizing the risks of crypto contagion spilling into the traditional economy. Nic Carter, a CoinDesk columnist and venture capitalist, went as far as calling the situation “Operation Choke Point 2.0,” a reference to the secretive Obama era policy of pressuring banks against servicing legal, but perhaps morally dubious, industries. Indeed, on one January day alone four White House advisers published a letter advising banks against crypto exposure; the National Economic Council released similar guidance discouraging more financial institutions from dealing with crypto; the Federal Reserve denied crypto custodian Custodia’s banking application and separately issued a policy statement detailing the risks of banks holding crypto-related deposits – including stablecoin reserves.

See also: Senators Reportedly Push Crypto Bank Silvergate on Ties to FTX

I’ve already gone on the record to say crypto will still be here on the other side of the “chokepoint,” and the increased clarity will actually increase the number and quality of banking relationships for crypto firms. The industry isn’t going anywhere, and the bankers I know still see a sales opportunity. This doesn’t exactly say anything about Silvergate, especially not about the karma question: whether it’d be ultimately good for the industry for Silvergate to fail. The bank signed its first crypto customer (Barry Silbert’s SecondMarket, which eventually evolved into CoinDesk’s parent, Digital Currency Group) in 2014, at a time when crypto companies were finding it impossible to get or keep bank accounts. FTX founder Sam Bankman-Fried once described the situation as, “Life as a crypto firm can be divided up into before Silvergate and after Silvergate.”

That testimonial from Bankman-Fried, which has been removed from Silvergate’s website, may give insight into the bank’s unwinding. The U.S. Justice Department opened a probe into Silvergate to unravel if the bank committed or contributed to fraud at FTX and Alameda Research. The investigation is ongoing, but, as the crypto gadflies at Protos noted, it’s already known that FTX used to direct customers to wire payments to Alameda’s banking account at Silvergate. In a December open letter to the bank, U.S. Senator Elizabeth Warren (D-Mass.) and others called that practice an “egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients.” That enough might be true. But who is to say what is just?