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A saga of ambition met a sobering finale as Silvergate Bank, once a burgeoning financial institution, voluntarily disintegrated this year, with its management's arms deep into precarious cryptocurrency deposits and accusations of familial favoritism creating a stumbling block, per findings from Federal Reserve inspectors.
Silvergate Bank, which experienced a meteoric rise by embracing the risky cryptocurrency market, voluntarily ceased its operations this March, bypassing a technical failure and thereby absolving itself from compulsory paybacks to depositors. A glance back to 2013 shows a marked shift in the bank's trajectory towards customers deeply entwined in cryptocurrency activities, as pinpointed by the review executive summary issued on September 27.
The ascent from a modestly recognized entity in the initial stretch of the 2010s to becoming a preferred bank for cryptocurrency patrons was sharp and significant. Noteworthy growth took the bank from managing deposits amounting to $1 billion in 2017, catapulting to an impressive $16 billion by 2021.
However, this growth tale wasn’t without its pitfalls. Federal Reserve critiques underline a crucial misstep - the bank evolved into predominantly a single-industry lender, safeguarding the majority of its client deposits, which were uninsured and did not accrue interest. Regulatory adherence should have necessitated the filing of a new application with the Federal Reserve. Nonetheless, governance overseers fell short in enforcing the initiation of new risk safeguard measures.
Moreover, official observations hinted at needed “firmer, prompter, and more assertive supervisory action”, recognizing that while certain governance supervisors had expressed doubts regarding the bank’s course, these apprehensions were not amplified to warranted levels.
The fragility of Silvergate’s crypto dependence was starkly exposed following the downfall of the FTX cryptocurrency exchange in November 2022, as capital worth multiple billions vacated the sector in the ensuing months.
Additionally, investigators emphasized not just financial, but ethical lapses. Nepotism among the bank’s upper echelons allegedly culminated in a flimsy and ineffective corporate framework, ill-equipped to navigate the multitude of risks it was swathed in during its high-velocity ascent. Familial links within the leadership team seemingly eroded the efficacy of the bank’s risk management functionality, leaving it vulnerably exposed to the inevitable turbulence it encountered.
