Fed Inspector Insights on Crypto And Nepotism For Silvergate Bank’s Downfall

According to a study by United States Federal Reserve inspectors, Silvergate Bank, previously a crypto-friendly institution, met its fate this year as a result of a strong reliance on hazardous crypto deposits and a culture of nepotism that led to inefficient management.

The Federal Reserve Board’s Office of Inspector General recently released an executive summary of its inquiry into the bank’s demise, attributing Silvergate Bank’s demise to its 2013 strategic shift that put an emphasis on “customers engaged in crypto activities.”

The report stated, “Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation.”

With deposits soaring from $1 billion in 2017 to $16 billion in 2021, Silvergate Bank has evolved from a relatively inconspicuous organization in the early 2010s into the preferred bank for crypto customers.

Over-Reliance on Crypto Deposits

The majority of Silvergate’s client deposits became uninsured and interest-free during this period of fast growth, thus transforming the bank into a lender to a single sector. The bank should have submitted a fresh application to the Federal Reserve if it had complied with current banking laws. Government regulators did not, however, put pressure on the bank to implement new risk management practices.

The study condemned the absence of “stronger, earlier, and more decisive supervisory action” to address these problems, despite the fact that several government supervisors had voiced concerns about the bank’s operations.

Silvergate Bank’s issues went beyond its cryptocurrency transactions. The bank’s senior management was found to have a culture of nepotism, which contributed to a weak corporate structure and a failure to handle the dangers brought on by its fast development.

The report concluded, “Silvergate’s board of directors and senior management were ineffective, and the bank’s corporate governance and risk management capabilities did not keep pace with the bank’s rapid growth, increasing complexity and evolving risk profile.”

Since Silvergate Bank chose voluntary liquidation in March 2023, it is not considered to have failed. As a result, the government did not need to step in to enforce the depositors’ restitution.