Silvergate Bank is not a failure of crypto, it’s a classic run on the bank fuelled by short sellers and politicians pandering to their lobbyists. Sealed by a political decision to not bail out a crypto-friendly bank

Silvergate bank is winding up, and lots of people are calling it a failure of crypto and doing victory laps. Nothing could be further from the truth

The reason Silvergate bank failed was a duration mismatch between its assets and liabilities :- customers deposited money in Silvergate, which Silvergate then used to buy long dated treasuries and municipal bonds which have very low default risk but the bond price are sensitive to interest rates. Meanwhile, last year was one of the worst years on record for bonds, due to Fed rate hiking cycle. Coupled with implosion in crypto markets (Genesis, FTX etc) meant there were huge redemptions of USD at Silvergate. However, since the bonds have faced a big drawdown, they had to constantly sell their assets to fund withdrawals. Now we know that Silvergate had to realize over $700m in losses by selling their bond holdings to fund withdrawals

Since FTX in November, Silvergate has been one of the most shorted stock - lots of prominent short sellers had made Silvergate their target. Politicians like Elizabeth Warren added fuel by singling out Silvergate. Warren aided short sellers by writing letters and putting political pressure on FDIC and FHLB to squeeze Silvergate out. All of this added more fuel to the bank run

There is nothing illegal in a federal chartered bank obtaining advances from other banking agencies to manage their liquidity situation. Yet these were used to put political pressure and create outrage (because crypto bad), and eventually shut down access to FHLB because other agencies don’t want to help out a bank if it looks like the government and government mouthpieces are against the idea.

Given that all banks run fractional banking, no other bank would have been able to withstand a bank run. All banks run asset liability mismatch and if there are huge withdrawals, they would have to sell their bonds at marked down prices and book losses. However, they usually get bailed out by Fed and other agencies by offering them a liquidity supply line or advancing loans. In worst case scenario, the failing bank gets merged into a larger bank. There have been more than 12 bank failures in the last 5 years where the failing bank was merged into a larger bank. In Silvergate’s situation, they had borrowed liquidity from FHLB but this pipeline was shut down after political pressure was put on the agencies. In the end, FDIC arrived at the scene to seal the bank’s fate

Tl Dr: this is just another episode in the ongoing unbank crypto operation, which is being dubbed as “Operation Chokepoint 2.0”. Silvergate could have easily been bailed out if Fed and the government deemed it necessary - like they bailed out dozens of other banks in the last decade or so. Post GFC 2008, they even bailed out corrupt banks after fraudulent actions by bank executives. The bailout at that time was magnitudes bigger than what Silvergate required. We will remember this the next time the financial system blows up and a corrupt bank has to get bailed out