Did regulatory pressure trigger Silvergate Bank’s downfall? New report weighs in

Silvergate Bank, once a key financial institution for the cryptocurrency sector, has become a cautionary tale of how regulatory pressure may have contributed to its downfall.

In a new report published on September 25, Nic Carter, a well-known industry analyst, delves into the circumstances that led to Silvergate’s collapse.

Carter suggests that informal regulatory actions, particularly an unpublicized mandate to limit cryptocurrency deposits, played a significant role in the bank’s demise.

This case highlights the broader implications for banks with ties to the crypto industry and raises questions about the role of US regulators in the 2023 banking crisis.

Silvergate Bank’s downfall

Silvergate Bank’s downfall began with the Federal Deposit Insurance Corporation (FDIC) and other regulators allegedly imposing informal rules that capped the bank’s cryptocurrency deposits.

According to Carter, confidential sources and bankruptcy filings reveal that regulators instructed Silvergate to limit its crypto deposits to just 15%, severely impacting the bank’s ability to operate in its core market.

While this cap was never officially disclosed to the public, its effects were profound, creating insurmountable financial pressure for the institution.

Silvergate’s close relationship with cryptocurrency exchange FTX further complicated its situation.

US Senators, including Elizabeth Warren, raised concerns about the bank’s involvement in FTX’s activities, although no criminal charges were ever filed against Silvergate.

Despite the lack of substantiated allegations, the political scrutiny fueled fear and uncertainty around the bank’s future, which ultimately contributed to its collapse.

Voluntary liquidation is rare

One of the most puzzling aspects of Silvergate’s downfall was the bank’s decision to liquidate voluntarily rather than enter FDIC receivership.

Carter points out that voluntary liquidation is rare for banks and suggests that regulatory pressures may have influenced this choice.

According to his report, the FDIC’s refusal to renew Silvergate’s loan agreements accelerated the bank’s financial troubles, forcing it to shut down before insolvency was officially declared.

Silvergate’s collapse signaled the beginning of a broader crisis in the banking sector, particularly among institutions with ties to cryptocurrency services.

Shortly after Silvergate’s fall, other banks, including Signature Bank, Silicon Valley Bank, and First Republic, also faced significant turmoil.

These banks, much like Silvergate, had relationships with the crypto industry, and their failures raised concerns about whether regulatory actions against cryptocurrency were having unintended consequences for the broader financial system.

The regional banking crisis of 2023 is now viewed as a domino effect, with Silvergate’s downfall serving as the initial spark.

Carter’s analysis points out that the regulatory crackdown on crypto-affiliated banks may have reached beyond its original intent, affecting banks with fintech partnerships like Cross River and Customers Bank.

In May 2023, the FDIC issued a consent order to Cross River Bank, targeting its partnerships with fintech companies.

Similarly, in August 2024, the Federal Reserve took enforcement action against Customers Bank, citing failures to comply with anti-money laundering laws.

US regulators overstepped to control cryptocurrency

Carter’s report raises the provocative question of whether US regulators overstepped in their efforts to control cryptocurrency.

He argues that actions by figures such as President Biden, Senator Elizabeth Warren, and the Federal Reserve had far-reaching consequences beyond the crypto sector, destabilizing regional banks and contributing to the 2023 banking crisis.

According to Carter, these regulatory efforts, while aimed at reining in cryptocurrency, may have had broader, unintended effects on the banking industry.

As the dust settles from Silvergate’s collapse, the future of cryptocurrency banking remains uncertain.

Regulatory scrutiny of banks with crypto ties has intensified, raising doubts about how long other institutions can continue operating under the current conditions.

Carter’s report warns that Silvergate’s fate could serve as a precedent for further action, leaving the sector to navigate an increasingly challenging regulatory landscape.

The full impact of Silvergate’s downfall, and whether regulatory pressure was the main trigger, will likely be debated for years to come.

However, its collapse has already reshaped the crypto banking sector, highlighting the delicate balance between innovation and regulation.

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