Why crypto’s go-to bank collapsed

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Yesterday, the financial world witnessed a classic run on the bank when Silvergate Capital, the go-to US lender for crypto companies, said it would wind down its operations and voluntarily liquidate.

ICYMI: Silvergate was, for most of its existence, a traditional Southern California regional bank. But by 2018, it had pivoted to crypto, recognizing that young digital asset firms were struggling to establish relationships with larger mainstream banks. Silvergate positioned itself as a conduit for these new companies that other institutions viewed with a mix of skepticism and disdain. It was a pretty shrewd business move at the time. But Silvergate went all in on crypto, and left itself overexposed in the crash that began last year.

As Bloomberg’s Max Reyes writes:

“After hitching its wagon so firmly to the new world of crypto, the bank had exposed itself to an old-world banking risk: When the industry’s prospects soured, Silvergate had little other business to lean on.”

The bank’s shares have cratered 98% from their November 2021 high. In the same period, the global crypto industry has lost two-thirds of its value, falling from a $3 trillion market cap to $1 trillion.


If you’re in the crypto biz at this moment, you’re working under a long, dark shadow cast by Sam Bankman-Fried, the entrepreneur who became a pariah when his crypto empire collapsed last year. That event sparked a rash of bankruptcies and put the entire industry on watch.

If traditional finance folks and regulators saw crypto as something of a nuisance before, FTX’s collapse and the criminal indictments that followed turned the market radioactive. The closer you were to FTX, the more trouble you could be in.

“There’s an old saying — ‘if you lie down with dogs, you wake up with fleas’ — and that’s what happened with Silvergate,” John Reed Stark, an outspoken crypto critic and former head of the SEC’s Office of Internet Enforcement, told the Wall Street Journal. He described Silvergate’s collapse as a “cataclysmic event for the crypto industry.”

To be sure, Silvergate hasn’t been accused of wrongdoing over its ties to FTX, but the bank acknowledged it had been investigated by regulators and the Justice Department.


Cards on the table: I am neither pro- nor anti-crypto. I am skeptical of it the same way I am deeply skeptical of (and fascinated by) pretty much anything involving large sums of money and zealotry.

In the fallout of Silvergate, bullish analysts are, predictably, pointing to how overexposed the bank was to a single industry, how it had lousy risk management, etc. — anything to avoid putting the blame on crypto.

“Silvergate’s demise was not a crypto problem,” said Marcus Sotiriou, an analyst at digital asset broker GlobalBlock. “Silvergate’s collapse was due to…not having enough cash, leading to the lack of capital from the bank run.”

And yes, 100% — Silvergate should have diversified rather than put all its eggs in the crypto basket, which is universally understood to be a basket full of spikes and broken glass prone to violent swings.

But also … there’s a reason the tight-knit network of crypto giants all flocked to Silvergate. Other, better-managed banks didn’t have the stomach for it.

I’ve heard the “don’t blame crypto” argument a thousand times. When FTX imploded, it wasn’t crypto’s fault — it was one bad apple, an old-fashioned fraud. And it was the same story nearly a year ago, when the Terra/Luna crash last spring wiped out billions overnight — don’t blame crypto; those were toxic algorithmic stablecoins, you can’t trust those. And ditto when Celsius, Voyager, and Three Arrows all went belly up in the “crypto winter” of 2022 — we can’t help that the regulatory frameworks let reckless actors deceive well-meaning investors…

There is a kernel of truth in all of those stories, but as the crypto dominoes keep falling, it becomes harder to ignore the through-line.

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