Fed Inspector Blames Relatives In Crypto Focus, Silvergate Bank Collapse

According to US Federal Reserve inspectors, crypto-friendly Silvergate Bank failed this year due to over-reliance on risky crypto deposits and reliance on kinship and kinship.

In its Sept. 27 review of the bank's failure, the Federal Board's Office of Inspector General pointed to Silvergate's shift in strategy in 2013 to focus on “clients engaged in crypto activities.”

“Silvergate's focus on crypto industry depositors, rapid growth and multi-layer funding concerns led to the bank's voluntary exit.”

In the year Silvergate, which evolved from a relatively small institution in the early 2010s, has rapidly expanded to become a major bank for crypto customers, growing from $1 billion in deposits in 2017 to $16 billion in 2021.

During this period of rapid growth, the bank said the bank had grown to become essentially an industry lender, with most of its customers' deposits being uninsured and non-interest bearing.

If the institution followed the existing banking regulations correctly, it would have to submit a new application to the federal government, but government regulators could not pressure it to create new risk prevention measures.

While some government supervisors expressed concern about the bank's actions, the Fed said they should have stepped up with “stronger, earlier and more decisive regulatory action.”

Silvergate's over-reliance on crypto became clear following the collapse of the FTX crypto exchange, which was discontinued in November 2022, with tens of billions of dollars of capital fleeing the sector in the months that followed.

Related: Scaramucci leads bid for Silicon Valley Bank's VC arm: Report

Silvergate's misdeeds were not limited to crypto. The investigators explained that the top management of the bank was transferred through relatives and relationships, which led to the creation of an inefficient and ineffective organizational structure to deal with the various risks that existed at the time.

“Furthermore, the nepotism evidenced by the numerous family relationships among members of the bank's senior management team undermined the effectiveness of the bank's risk management function.”

“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,” the report concluded.

The bank wound up voluntarily in March 2023, meaning it didn't technically fail. This meant that the government should not have intervened and forced depositors to return.

Magazine: Blockchain Investigators – Matt Gox's failure saw the birth of Chinalysis