Getting its start in San Diego in 1988, Silvergate Bank is a savings & loan association. The institution advertises itself as a “leading provider of innovative financial infrastructure solutions and services” for the crypto industry.
Essentially, it is a fintech representing over 1,300 digital currency projects. Silvergate boomed along with the rest of the industry. Its stock price skyrocketed by more than 1,500% from November 2019-2021.
Housing Funds for a Crypto Bailout
The bank has found itself in a precarious position following the collapse of cryptocurrency exchange FTX. As the platform imploded in November 2022, customers withdrew $8.1 billion from Silvergate in the fourth quarter. That is roughly 70% of total deposits.
To balance these withdrawals, Silvergate received billions of dollars in advances from the Federal Home Loan Bank (FHLB) of San Francisco at the end of 2022. The fintech wrapped up the year with $4.3 billion of FHLB money on its balance sheet.
The bailout made waves due to the mission statement of the FHLB: to provide its members “with a reliable source of funding for housing finance.” In fact, President Hoover created the FHL Bank System in 1932 with the goal of lowering the cost of home ownership.
The Government Response
Using these FHLB funds as a lifeline for a crypto bank raised questions about the operations and stability of the cryptocurrency industry. Silvergate’s reputation diminished even further after Senators Elizabeth Warren (D-Mass.), John Kennedy (R-La.), and Roger Marshall (R-Kan.) sent a letter to the bank asking questions about its role in FTX activity. S
Furthermore, the use of FHLB funds as a bailout for a crypto bank raises concerns about government intervention and the potential for crypto supporters to struggle to convince investors that crypto is legitimate. As John Heltman wrote in American Banker, “The FHLB system is a government-sponsored enterprise, and its advances are backed by the full faith and credit of the U.S. government.”
Legal Versus Questionable
While this bailout might be deemed questionable, it is not illegal. In fact, it is a boost to the legitimacy of cryptocurrency when a government program swoops in for assistance. Silvergate has also taken internal measures to counterbalance the FTX fallout.
The bank has started with cost cuts by laying off 40% of its staff. Silvergate is also abandoning expensive ideas like the Diem project it bought from Meta Platforms early last year.
