This unusual suspect may have caused Silvergate’s collapse

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Lessons learned

Silvergate Bank’s parent company, Silvergate Capital, has filed for bankruptcy to wind down its business operations.

For the first time, we got some insights into what happened to cause the bank to shutter in 2023 and, well, it’s pretty grim.

A source familiar with the matter told us that, to put it simply: Silvergate didn’t fail despite the pressures it faced.

This conclusion is backed up in a filing from Elaine Hetrick, the former chief administrative officer at the parent company, who wrote that the sudden post-FTX shift from regulators “made [it] clear that, at least as of the first quarter of 2023, the Federal Bank Regulatory Agencies would not tolerate banks with significant concentrations of digital asset customers, ultimately preventing Silvergate Bank from continuing its digital asset focused business model.”

What’s also interesting is that Hetrick claims Silvergate managed the bank run that happened in 2023.

“Although Silvergate Bank possessed more than sufficient assets to cover its liabilities to depositors and had no lending or other business relationship with FTX beyond holding deposits and providing bank account services, perception of risk and fear of contagion, likely as a result of the string of cryptocurrency-related insolvency proceedings, led to substantial withdrawals of deposits from Silvergate Bank,” she wrote.

She added that Silvergate “took decisive action, first to stem the tide of a bank run in the midst of industry crisis, then, following the shift in regulatory approach, in the liquidation of Silvergate Bank in a manner that would protect depositors from suffering losses.”

One of the big narratives following the collapse was that Silvergate and its executives misled investors, a claim the SEC made when it pursued legal action against executives and the now-bankrupt bank in July.

“SCC, [former CEO Alan] Lane, and [former chief risk officer Kathleen] Fraher misrepresented the operational and legal risks facing the Bank by falsely stating in SEC filings and other public statements that the Bank had an effective BSA/AML compliance program tailored to the heightened risks posed by its crypto asset customers,” the SEC said.

Keep in mind that the Fed, in a report last October, blamed Silvergate’s crypto activity as a reason for its failure.

But it seems Silvergate had, for all intents and purposes, been compliant with regulators up until those same regulators began taking a more unfriendly approach to banks with heavy crypto concentrations.

Hetrick highlighted a January 2023 joint statement from the Federal Reserve, FDIC, and Office of the Comptroller of the Currency, all advising potential concerns around banks involved with crypto activities.

The statement warned against allowing any of the “volatility” to transfer over to the traditional banking system.

Following the statement, according to Hetrick, Silvergate tried to restructure its business by ending its crypto custody business and letting go of 200 people.

But it wasn’t enough.

The same group of regulators kept up the pressure in February with another joint statement, echoing the one in January.

“Following the rapid contraction of Silvergate Bank’s business, Silvergate Bank had stabilized, was able to meet regulatory capital requirements, and had the capability to continue to serve its customers that had kept their deposits with Silvergate Bank,” Hetrick said, going on to explain:

“However, the increased supervisory pressure on Silvergate Bank and other banks focused on servicing crypto-asset businesses forced Silvergate Bank to a point where it would have needed to remake its business model away from its focus on crypto-asset businesses, seek to sell itself as a going concern in the shadow of the regulatory overhang or begin winding down its affairs with the goal of preserving as much value as possible for stakeholders.”

While nothing can be done to resuscitate Silvergate at this point, the 132-page filing portrays a concerning picture — one where it would seem that regulators were more at fault than FTX or any of the now-bankrupt crypto lenders in Silvergate’s collapse.

— Katherine Ross

Data Center

Bitcoin continues to hold on to $63,672, up nearly 1% in the last day.
Ether, on the other hand, is taking the reins. Per Coinbase data, ETH is up to $2,643, up 2.3% in the past day.
MOTHER is down 4% per CoinGecko even after Iggy Azalea revealed a new online casino dubbed Motherland at Breakpoint.
Total liquidations in the past 24 hours sit at $165 million, per CoinGlass data.
An address suspected to belong to the Ethereum Foundation sold 200 ETH for $528,000 DAI, according to Arkham Intelligence data.

🤔 Crypto policy déjà vu

Well, it happened — Vice President and Democratic presidential nominee Kamala Harris talked about crypto.

As is frequently the case in politics, the news generated significant attention not for the substance of the comments but the very fact that they took place at all.

Speaking at a Wall Street fundraiser — the AP says she collected some $27 million during the event — Harris pledged to “encourage innovative technologies like AI and digital assets, while protecting investors and consumers,” according to Bloomberg.

As our crypto readers are no doubt aware, the industry is solidly pro-Trump, given the Republican nominee’s far-reaching promises, including a pledge to stop selling government bitcoin and dump Gensler as SEC chair. Those pledges have translated into campaign dollars for Trump directly, as well as a small constellation of crypto-tied super PACs.

(There’s also the whole DeFi family business that has, charitably, raised an army of eyebrows across Crypto Twitter, but it’s unclear whether that has dented political support in any meaningful way.)

At least some of the pro-Trump sentiment is driven by a deeply held belief that the Biden White House, and by extension Harris, is out to get crypto. So, it stands to reason that, from a fundraising angle, the Harris campaign might want to push back and signal at least some openness to supporting the industry.

Yet you’d be forgiven by this editor for thinking that you’ve heard these Harris comments before. They’re essentially what the Biden administration has been saying all along, including its September 2022 framework for digital asset framework. That framework essentially said the same thing: Support innovation (responsibly) while protecting anyone who might engage with digital assets (consumers and investors).

To put a finer point on it: Harris said something, just not anything new or remarkable.

Perhaps this is a presage for more to come. Maybe there’s a campaign statement in the works. There are 42 days to go between now and Election Day — anything, including a detailed, by-the-issue campaign breakdown of the crypto issues of the day — is possible.

If I had to hazard a guess, I’d say this is as far as it goes. But I’d love to be wrong.

– Michael McSweeney

The Works

The SEC finally signed off on listing and trading options on BlackRock’s bitcoin ETF.
Crypto ETFs saw a second consecutive week of inflows, with bitcoin topping $284 million, CoinShares noted.
Fortune’s Leo Schwartz sat down with PubKey bar owner Thomas Pacchia to talk about former president Donald Trump’s visit last week.
Core Scientific’s AI focus could be a boon for the business, Canaccord said in a note.
The Bank of Canada is not interested in offering a digital loonie anytime soon, CBC reported.

The Riff

Q: Does CBDC research matter anymore?

Hot take: no.

I remember being a young crypto journalist and writing about Canada’s CBDC program. It seemed like a huge deal. A government currency on crypto rails? Crazy, maybe, but fascinating, a potential future when crypto would exit the über-fringe and find a way to mainstream use.

One wonders whether the Bank of Canada is reading the tea leaves here: Who needs a CBDC at this point? Such experiments represent some good wonky fun, but in this day and age, it strikes this writer as adding more bells and whistles to the payments process, not less.

There’s also the continuing bloom of stablecoins and the entry of firms like PayPal into the mix. PayPal once paid tidy lip service to CBDCs, a sentiment that feels more on the backburner than ever.

At least here in the US, CBDCs have been held up as a tool for oppressive government, meaning it’s very unlikely that Congress ever signs off on the legislative changes needed to give the Fed permission to turn its own research into reality.

RIP CBDCs? I think so.

– Michael McSweeney

Yes and no.

Of course, we still want to understand use cases and who would use it and how it could work, but let’s be honest: No one’s too keen on implementing a CBDC anytime soon.

All of the research right now is theoretical, but countries like the US and Canada aren’t going to want to keep pouring money and resources into research that may or may not pan out into an actual offering and that makes sense.

Perhaps at this point, we’re too early. Until we’re not.

But honestly, as interesting as CBDCs can be, folks are more intrigued to see how things like stablecoins and real-world assets can grow as sectors. CBDCs are, quite frankly, just a little too boring for us right now.

— Katherine Ross

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