What happened

Shares of the crypto bank Silvergate Capital (SI 0.79%) had dropped close to 31% as of 11:19 a.m. ET today after the bank announced that it is planning to wind down its operations and liquidate the bank after months of turmoil.

So what

Silvergate Capital had provided important infrastructure for the crypto ecosystem, having created a payments network that could instantly clear and settle fiat transactions between two parties on the network at any time. The network was popular among crypto exchanges and institutional traders because crypto trades around the clock, while much of the U.S. banking system operates on a lag.

However, once the FTX debacle played out, things at Silvergate started to go downhill. FTX had been a major client of Silvergate's, and there was a crisis of confidence at the bank amid concerns about whether Silvergate will face regulatory action for its relationship with FTX. The U.S. Department of Justice is investigating the bank.

In the fourth quarter of 2022, Silvergate saw close to 70% of its deposits leave the bank, forcing it to sell large chunks of its bond portfolio while the bonds were trading at a loss, destroying lots of shareholder equity. Rising interest rates have put most bonds underwater.

Last week, Silvergate delayed filing its annual report with the Securities and Exchange Commission and reported that more bond sales had continued in the current quarter, resulting in further losses and potentially putting the bank below its required regulatory capital ratios. The bank also said it had concerns about its ability to continue on.

Shortly after that, Silvergate shuttered its payments network, and at that point, it looked like the bank, which had once been viewed as a very promising company and stock, was all but finished.

Now what

In a press release, Silvergate said that it plans to fully repay its depositors and is also trying to figure out how to protect the residual value of other assets, such as its proprietary technology.

What will be interesting moving forward is how the fall of Silvergate impacts liquidity in the crypto ecosystem, as Silvergate's payments network had facilitated well over $1 trillion of transactions. Various media outlets this week reported a sharp decline in Bitcoin volume with Silvergate's payments network no longer operational.