The demise of the formerly crypto-friendly Silvergate Bank this year has ignited conversation over the prudence of banks focusing extensively on cryptocurrency. Federal inspectors traced the bank’s collapse primarily to an over-reliance on high-risk crypto deposits and managerial faults linked to nepotism. Silvergate Bank, which had grown from dealing with $1 billion in deposits in 2017 to 16 times that amount in silver years, became the go-to bank for crypto clientele. It even shifted its strategy to focus on customers engaged in cryptocurrency activities.
Yet, this heavy focus on cryptocurrency is blamed for the bank’s voluntary liquidation. The bank essentially transformed into a single-industry lender, with most customer deposits uninsured and non-interest bearing. This risk exposure escalated when the crypto exchange FTX crumbled, leading to a massive capital outflow in the months following.
However, crypto-related dealings weren’t the sole culprits behind Silvergate’s demise. The report also pointed the finger at nepotism. Several familial connections within the bank’s senior leadership team hindered the effectiveness of the risk management function. The bank’s corporate governance and risk management capabilities, the report argued, couldn’t keep up with the institution’s fast-paced growth and complex risk profile.
Ethical misgivings aside, if the bank had been abiding by banking regulations, it would have filed a new application with the Federal Reserve (Fed). But it seems that bureaucratic inertia delayed proper action, as the bank was not pressured to establish new risk management measures. Some argue that stronger, decisive action from government supervisors would have saved the bank from its eventual fate.
However, the response to Silvergate’s debacle isn’t the only issue stirring up controversy. The embattled crypto lender, Celsius Network, proposes to begin repayment to its customers by year-end with a reorganisation plan. If approved, it would be one of the first defunct crypto platforms from 2022 to be revived under a Chapter 11 bankruptcy case. It remains to be seen, however, how this move fares — especially given the collapse of Luna — and whether it sets a precedent for other ailing crypto platforms.
In the midst of these developments, the question remains: How much risk is too much when dealing with volatile virtual currencies? That is a significant challenge ahead for regulators and businesses banking on crypto. As the saga of Silvergate and Celsius continues to unfold, their experiences underscore the importance of robust risk management and the potential pitfalls of overreliance on any industry – crypto or otherwise.
Source: Cointelegraph
