As Silvergate Capital Corp. filed for Chapter 11 bankruptcy protection on Wednesday, a company executive blamed the collapse of its banking subsidiary last year on regulators who soured on its crypto-friendly business model.
In legal filings related to the bankruptcy, a Silvergate Capital executive assigned responsibility for the self-liquidation of the La Jolla, California-based bank to regulators at the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Those agencies issued a pair of joint regulatory statements on crypto-related risks in early 2023 following the demise of the crypto exchange FTX.
Elaine Hetrick, Silvergate Capital's chief administrative officer, said in a declaration supporting the bankruptcy filing that the former Silvergate Bank was able to manage a bank run, pay all of its depositors as they withdrew funds and withstand substantial losses on the sale of Treasury bonds and agency securities. But regulatory scrutiny made the bank's survival "untenable," she said.
"These Chapter 11 Cases are the culmination of a successful process led by the Debtors' directors and management to repay all of Silvergate Bank's depositors and wind down its operations as a result of headwinds within the digital asset industry followed by a shift in regulatory approach that made Silvergate Bank's business model untenable," Hetrick wrote.
Silvergate Capital, the former Silvergate Bank and another subsidiary, Spring Valley Lots, filed their petitions in the U.S. Bankruptcy Court for the District of Delaware.
Hetrick claimed that Silvergate Capital sought to protect depositors from suffering losses and avoid any claims against the FDIC's Deposit Insurance Fund. She said the bank's challenges reached an inflection point in early 2023 when, in the midst of FTX's collapse, regulators issued two statements about banks holding crypto assets.
In January 2023, the Federal Reserve, the FDIC and the OCC released
At the time, Silvergate Bank's remaining deposit base was highly concentrated with crypto-asset related depositors, Hetrick said. In response to the regulators' joint statement, the bank announced a restructuring plan, cut 40% of its employees and eliminated its digital asset custody business and certain cash management services.
Then in late February 2023, the regulators issued a second joint statement on liquidity risks to banks from vulnerabilities in crypto-asset markets. Silvergate Bank announced plans to self-liquidate the following month.
"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," Hetrick said.
The costs of operating the business while trying to pivot to a new business model outweighed the potential benefits, she said.
"Despite facing an unprecedented confluence of industry and regulatory pressures, Silvergate Bank did not fail," Hetrick wrote.
In July 2024, the company agreed to pay tens of millions of dollars to regulators to resolve investigations. Silvergate Bank changed its name to Silvergate Liquidation Corp. and relinquished its banking charter to California's Department of Financial Protection and Innovation.
Silvergate Capital paid $43 million to settle an investigation by the Federal Reserve, $20 million to settle an investigation by the California agency and $50 million to the Securities and Exchange Commission in connection with certain public statements made by the company in late 2022 and early 2023, though the payment to the SEC was offset by the other two settlements.
At a court hearing scheduled for Thursday, Silvergate Capital is expected to ask the bankruptcy judge to allow the company to continue operating as it goes through the bankruptcy process.
