In early March, California-based Silvergate became the first domino to fall in a mini-banking crisis, announcing its intention to voluntarily liquidate and wind down operations.
With 90% of its deposit base coming from the digital asset industry, the bank’s fortunes suffered along with the sector’s after the high-profile collapses of projects like TerraUSD and FTX.
Today, the Federal Reserve Board and Silvergate’s state regulator, the California Department of Financial Protection and Innovation, finalized a consent order, or a settlement agreement that would guide Silvergate’s wind-down process.
In the 11-page document, the two agencies lay out how Silvergate pursued a business strategy focused on the crypto-asset industry, both domestically and internationally, including the creation of a real-time payments network known as the Silvergate Exchange Network.
Recent examinations of Silvergate had “identified numerous deficiencies, including with respect to both safety and soundness and compliance with banking laws and regulations,” according to the agencies, which didn’t list examples.
During the bear market, Silvergate suffered severe outflows due to its reliance on the digital asset industry, including $8.1 billion in the fourth quarter of 2022. As its future looked uncertain in the early months of 2023, it lost key clients, including Coinbase, Circle, and Paxos. The week before announcing its closure, Silvergate closed its payments network, which had been an essential platform for crypto companies such as stablecoin issuers to complete real-time settlements.
As opposed to later failures at Silicon Valley Bank and Signature, Silvergate chose to voluntarily liquidate, assuring that it would be able to complete full repayments of all deposits, spurring an unconventional process for both regulators and the firm itself.
As part of the consent order, Silvergate agreed to submit a self-liquidation plan within 10 days, as well as to implement restrictions on so-called “golden parachutes,” or additional compensation to employees involved in the wind-down.
In another clause, Silvergate agreed to preserve all records and avoid any deletion or destruction of an exhaustive list of documents, including everything from voicemails and emails to texts and ephemeral messaging applications.
Given Silvergate’s high-profile crypto clients, from Binance to FTX, the records could prove quite valuable to law enforcement officials who are building criminal and civil cases. In February, Bloomberg reported that the Justice Department was looking into Silvergate’s dealings with FTX and its associated trading firm, Alameda.
The consent order also specifies an ongoing investigation by both the Federal Reserve Board of Governors and DFPI into Silvergate’s relationship with FTX and Alameda, as well as transactions over its payments network. The agreement compels Silvergate to assist with the investigation.
Silvergate did not immediately respond to a request for comment.
