California-based Silvergate Capital and Bank has been ordered to cease operations by the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation.
The San Francisco Federal Reserve and the Department of Financial Protection and Innovation found several flaws during recent inspections. This prompted the order to be issued under the Federal Deposit Insurance Act and California financial law.
Since at least 2013, Silvergate has provided the crypto-asset sector with its banking and financial services. The Silvergate Exchange Network (SEN), a near-real-time payments network within Silvergate Bank, was essential to the company’s business plan.
However, recent events, such as the collapse of FTX Trading Ltd. and its subsidiary, Alameda Research, to significant drops in deposits from customers linked to crypto assets. This, in turn, caused funding and liquidity pressures on the bank and a decline in revenue-generating activities.
Silvergate financial problems
On March 1, Silvergate Capital Corporation announced that it would delay filing its annual report with an assessment of its ability to continue as a going concern, reassess its business plans, and obtain audited financial statements.
On March 7, the Board of Directors of Silvergate Bank approved the FIC’s voluntary liquidation of the bank out of receivership to ensure all depositors’ money is returned.
The Board of Governors, DFPI and Silvergate entered into a cease and desist order to ensure the orderly liquidation of Silvergate and compliance with all relevant laws.
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The order states that the company must use its financial and administrative resources to strengthen the bank, that it must submit a self-liquidation plan for the orderly liquidation of operations, that it must protect its cash assets, and that it must obtain permission from the court before making certain capital distributions or engaging in activities new business.
It also requires ongoing cooperation with regulatory agencies, such as providing information, documentation, and testimony about ongoing investigations and ensuring that records are maintained.
Silvergate Capital Corporation and the insolvent Silvergate Bank agreed to the ruling and abandoned any further legal action against its terms. It will remain in effect until the Board of Governors and the DFPI amend or rescind the order.