Crypto-Friendly Silvergate Bank Collapsed Due to Over-Reliance on Risky Crypto Deposits and Nepotism, Says Federal Reserve
According to inspectors at the Federal Reserve, Silvergate Bank, known for its crypto-friendly stance, collapsed this year due to an over-dependence on risky cryptocurrency deposits and nepotism that resulted in ineffective management.
The Change in Strategy
In a recent executive summary of its review into the collapse of Silvergate Bank, the Federal Reserve Board’s Office of Inspector General highlighted the bank’s change in strategy in 2013. The bank shifted its focus to “customers engaged in crypto activities,” which ultimately led to its downfall.
“Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation.”
Rapid Growth and Concentration
From being a relatively unknown institution in the early 2010s, Silvergate rapidly expanded to become a leading bank for crypto clients. Its deposits grew from $1 billion in 2017 to $16 billion by 2021. However, during this period of exponential growth, the majority of its customer deposits were uninsured and non-interest bearing.
Lack of Compliance with Banking Regulations
The Federal Reserve noted that if Silvergate had followed existing banking regulations properly, it should have filed a new application with the Fed. However, government supervisors failed to pressure the bank into establishing new risk protection measures.
The report highlights that while some supervisors expressed concerns about the bank’s activities, stronger and more decisive supervisory action should have been taken.
Collapse Triggered by FTX’s Failure
Silvergate’s heavy reliance on crypto was exposed following the collapse of the now-defunct crypto exchange FTX in November 2022. This led to a significant outflow of capital from the sector, causing further troubles for Silvergate.
Nepotism and Ineffective Management
Investigators also discovered that nepotism was prevalent in the bank’s senior management, resulting in an incompetent corporate structure that failed to address the risks it faced.
“Further, nepotism, evidenced in the several familial relationships among members of the bank’s senior leadership team, undermined the effectiveness of the bank’s risk management function.”
The Voluntary Liquidation
Silvergate Bank voluntarily wound down its operations in March 2023. This meant that the government did not have to intervene and force the bank to repay depositors.
Hot Take: Lessons Learned from Silvergate Bank’s Collapse
The collapse of Silvergate Bank serves as a cautionary tale for financial institutions operating in the crypto industry. It highlights the risks associated with over-reliance on cryptocurrency deposits and the need for effective risk management strategies. Additionally, it underscores the importance of compliance with existing banking regulations and the avoidance of nepotism within senior management. As cryptocurrencies continue to gain prominence, it is crucial for banks and regulators to learn from Silvergate’s mistakes and ensure proper oversight and governance in this rapidly evolving sector.
By
By
By
By
By
By