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Silvergate and FDIC Explore Alternatives to Recover Bank

The latest buzz in the crypto world is that regulators have descended on the headquarters of Silvergate Capital Corp., a crypto-friendly bank grappling to keep its business afloat.

No Clear Decision Yet

According to sources, Federal Deposit Insurance Corp. (FDIC) officials have been discussing with Silvergate’s management to find ways to steer clear of a shutdown. One option on the table is to bring in investors from the crypto industry to bolster Silvergate’s liquidity.

As per insiders, FDIC examiners arrived at Silvergate’s offices in La Jolla, California, last week to assess the situation. However, the beleaguered bank has yet to decide how to tackle its deepening financial crisis. 

It’s worth noting that the FDIC examiners were permitted to inspect Silvergate’s offices by the Federal Reserve, the lender’s primary federal overseer.

The involvement of FDIC and the Fed underscores the gravity of Silvergate’s woes. The bank had warned last week that mounting losses could force it to reevaluate its viability. Since the government insures deposits from the bank’s clients, the regulator could play a crucial role in any potential solution.

However, another source clarified that the involvement of FDIC and the Fed doesn’t necessarily mean that Silvergate can’t find its way out of this situation alone.

According to Silvergate’s filings, the bank had deposits worth $6.3 billion as of December 31, 2022. That’s less than half the $13.2 billion it had reported at the end of September.

Currently, FDIC examiners are scrutinizing Silvergate’s books and records. The bank had been severely impacted by crypto exchange FTX’s collapse, which compelled it to sell billions of dollars worth of assets and take steps to stabilize its balance sheet.

Moreover, the bank reported a $1 billion loss last quarter. It announced last week that it was shutting down its flagship crypto payments network after clients distanced themselves amid growing uncertainty. Adding to its woes, the bank is also facing an investigation by the Justice Department’s fraud unit, probing its dealings with FTX and trading firm Alameda Research.

If Silvergate cannot pull itself out of this financial quagmire, regulators may put it into receivership, effectively taking over the lender. In such a scenario, the FDIC usually prefers to merge the struggling bank into a healthy one or pay off depositors, who are insured for up to $250,000 per depositor, per insured bank, for each account ownership category.

All these developments have hastened the efforts of American bank regulators to understand and regulate the digital asset industry. When asked about these efforts, Fed Chairman Jerome Powell remarked that they’re keeping a close eye on the crypto space and ensuring that regulated financial institutions are cautious in their engagement with the industry.