The narrative surrounding Silvergate Bank presents two distinct perspectives. In one view, the bank's aggressive accumulation of cryptocurrency deposits led to its downfall due to a failure to adequately monitor transactions exceeding $1 trillion. In the alternative view, the bank operated as a viable institution equipped with advanced technology, ultimately facing regulatory pressure to cut ties with the crypto sector.
On March 8, 2023, Silvergate Bank declared its intention to wind down operations voluntarily. Notably, the bank offered the Silvergate Exchange Network, or SEN, which facilitated the transfer of US dollars for cryptocurrency firms in real time, available around the clock, thereby circumventing the slow processes typical of traditional wire transfers.
However, the SEN was discontinued on March 3, 2023, precisely five days before the official announcement of the bank's liquidation. At the point of SEN’s closure, Silvergate remained technically solvent and capable of settling obligations to its depositors.
The trigger for this decline was akin to a classic bank run. Following the collapse of FTX in November 2022, numerous cryptocurrency businesses that had their funds stored at Silvergate began rapidly withdrawing their deposits. The bank pledged to return all deposits amidst an organized winding down, avoiding a receiver from the FDIC and ensuring no losses for depositors.
Compounding the situation, the SEC disclosed a failure in Silvergate’s transaction monitoring system, which neglected to review over $1 trillion in transactions processed via SEN during a crucial period from November 2022 through January 2023. Subsequent regulatory actions culminated in civil penalties totaling approximately $63 million, with the SEC assessing $50 million against Silvergate for shortcomings concerning anti-money laundering controls and inadequate public disclosures. Furthermore, an investor class-action lawsuit resulted in an additional settlement of $37.5 million, based on claims of misrepresentation regarding the bank's anti-money laundering practices and customer vetting operations.