- Silvergate Bank was the first Crypto-friendly bank that showed interest in the crypto industry.
- It provided financial services to the launching crypto companies.
- Following the bankruptcy of FTX, Silvergate Bank closed on March 8, 2023.
The Crypto Pursuit
Silvergate Bank was founded in 1988 as a financial services company and was finally reorganized into a bank in 1996. The bank was a success when in 2008, Alan Lane joined as its CEO. The bank had assets worth $800 Million; even so, Alan was continuously looking for growth opportunities.
The Crypto Companies
This search ended when Alan looked at the fresh crypto companies opening because of the crypto buzz, but they were rejected by traditional banks, reasoning their business model. His frequent visits to Bitcoin conferences and meetings with young Bitcoin enthusiasts confirmed Alan of the underlying opportunity.
The year 2013
The Board of Directors agreed upon Alan’s request, and Silvergate Bank became the first financial institution to step into the Crypto Field, inviting Crypto Companies.
SecondMarket, a registered Bitcoin broker company, became Silvergate’s first client. Although Blockchain was new in the market, Alan and Silvergate tried to understand it.
The Challenges Ahead
However, the launch of Bitcoin and its success and wide acceptance led to the emergence of other Blockchain networks and still more crypto companies. The Bank needed to expand its features and services to be in this exponentially growing market.
Another major issue was the working hours. Banks run just 8hrs for 5 days a week, whereas this network was online 24hrs and 7 days a week, which caused serious troubles to its clients.
A Solution, Silvergate Exchange Network
Silvergate Bank launched its Silvergate Exchange Network (SEN) to address this issue. Before the launch of SEN, Silvergate already had its transactional APIs running, which enabled customers to participate in transactions without logging in to the bank’s interface. With these as a base, the SEN helped the bank bridge the gap between traditional finance and Bitcoin.
SEN was a network that allowed the easy transfer of fiat currencies between the bank’s institutional customers and cryptocurrency exchanges.
How SEN works
First, any customer interested in SEN opened their bank account. Each customer then receives a unique SEN ID.
Customers first deposited their money into the account and then instructed the cryptocurrency exchange to credit the amount and provide them with cryptocurrencies.
A similar was the case when a customer wanted to convert cryptocurrency to his fiat currency. The exchange sent the equivalent fiat currency to the person’s bank account in Silvergate, and then he can withdraw them.
Thus, Silvergate excelled in becoming a medium becoming institutional customers and crypto exchange platforms, operating 24*7*365. A unique feature was the real-time settlement of funds which enabled the quick and efficient transfer of funds.
SEN was a success, and in just two years, the volume transferred quarterly rose to $60 Billion.
Silvergate goes Public
Silvergate offered its share at $12 and got $40 Million when it went public on New York Stock Exchange in Nov ’19. Silvergate now had a fleet of clients with all the major crypto exchanges like Kraken, Coinbase, and Gemini and companies that managed stablecoins like USDC, TUSD, and Gemini Dollar.
The Downfall
FTX, a crypto exchange firm, was a major customer of Silvergate Bank and used its SEN to transfer funds between clients and the exchange. On Nov 22, FTX declared itself bankrupt and filed for bankruptcy. FTX had improper relations with Alameda Research and Trading firm, founded by Sam Bankman-Fried, the founder of FTX.
Alameda was the medium between customers and FTX, where customers would send their deposits to Alameda, and FTX credited the customer’s account. However, Alameda never sent the money to FTX, moreover, lost it. When a leaked report of such malicious practice reached the customers, they rushed to withdraw their money, but FTX couldn’t pay them back because it never had the money it thought it had.
FTX, a major customer of Silvergate, turned out to be a Mess.
What followed then
Following the collapse of FTX, customers rushed to withdraw their funds from the bank. The investors no longer trusted the bank, and their deposits decreased from $12 Billion to just $3.9 Billion. The continuous withdrawals forced the bank to sell its securities and assets to pay back. Silvergate reported a $ 1 billion loss for the fourth quarter of 2022.
Companies like Coinbase, Galaxy-digital, and Binance no longer partnered with Silvergate.
Delay in report filing and final closure
The bank couldn’t file the annual Form 10-K report for the year 2022 and reported that they need time to reevaluate their balance sheet. This proved a hint of the financial crisis the bank was facing,
Finally, on March 3, the bank issued a statement that it would discontinue the operation of SEN.
On March 8, 2023, Silvergate Bank announced to wind down its operations and liquidate the bank.
Final Thoughts
Silvergate Bank made a bold statement and took a risk when it first announced to enter the crypto market. Its collapse again reminds us of the volatility in the crypto industry and why the traditional finance sector is still far from joining the cryptocurrency industry.
