Executive from Silvergate highlights 'oversight stress' in bankruptcy declaration documents
In a significant development, Silvergate Capital Corp., the parent company of Silvergate Bank, has filed for Chapter 11 bankruptcy in Delaware. The move comes amidst increased supervisory pressure on banks focused on servicing crypto-asset businesses, which forced Silvergate to consider remaking its business model, selling itself, or winding down its affairs.
The bankruptcy filing marks the culmination of a process to repay depositors and wind down operations due to headwinds in the digital asset industry and a shift in regulatory approach. Notably, Silvergate Bank's deposit base was highly concentrated with crypto-related funds.
The company's woes stem from compliance and anti-money laundering (AML) issues. In July 2023, Silvergate settled with regulators for failing to monitor more than $1 trillion in Silvergate Bank customer transactions between 2021 and 2023. The settlement involved allegations that the company made materially false and misleading statements about its compliance with AML and customer identification programs.
The settlement amounted to $37.5 million as part of a securities class action. The allegations centered on inadequate controls to prevent money laundering, potentially misleading investors about the bank's risk management and regulatory compliance.
Silvergate Bank, a federally regulated depository serving major cryptocurrency platforms, was particularly vulnerable to AML concerns. The bank's winding down operations were announced earlier in 2023, and the settlement was part of the related legal proceedings.
The company neither admitted nor denied guilt in the settlement. Silvergate Capital had no remaining lines of business at the time of the filing, and its roughly $163 million in cash will be divided among stakeholders.
In a joint statement, federal bank regulators expressed significant safety and soundness concerns with business models concentrated in crypto-asset-related activities. Regulatory penalties for an allegedly lackluster AML program were also imposed at the same time.
The collapse of crypto exchange FTX several months before the bankruptcy filing may have added to Silvergate's financial woes. Despite the challenges, Silvergate Capital expects to fully repay bondholders and make payments to those who hold preferred equity, but not those who hold common stock.
[1] Source: Reuters, "Silvergate Bank to wind down operations due to recent industry and regulatory developments," 13 March 2023. [5] Source: Reuters, "Silvergate Capital Corp files for bankruptcy in Delaware," 9 April 2023.
- The financial woes of Silvergate Capital Corp. were exacerbated by a shift in the regulatory approach towards businesses involved in crypto-asset transactions, technology being a crucial aspect of these operations.
- Amidst increasing scrutiny on anti-money laundering (AML) practices in the business and technology sectors, particularly those serving crypto-asset businesses, Silvergate Bank's deposit base, heavily concentrated with crypto-related funds, was a significant contributing factor to its bankruptcy filing.
