Silvergate Bank Shut Down Because Of Operation Choke Point 2.0, Not Insolvency

For the first time, Operation Chokepoint 2.0, the suspected crackdown on financial institutions servicing crypto firms in the U.S., appears to have been confirmed through on-the-record testimony.

On Sept. 18, Elaine Hetrick, the former chief administrative officer of Silvergate Capital Corporation, filed a declaration supporting Silvergate’s bankruptcy filing on Sept. 17.

“Agencies would not tolerate banks with significant concentrations of digital asset customers, ultimately preventing Silvergate bank from continuing its digital asset-focused business model,” Hetrick said.

Silvergate entered bankruptcy proceedings to complete its liquidation and wind down operations. After repaying customer deposits, Silvergate will hold $163 million, which it will divide among shareholders. Silvergate expects to pay out preferred equity shareholders, but not common stockholders. Bondholders are also owed $18 million.

Silvergate was among several crypto-friendly banks that failed in early 2023 alongside Silicon Valley Bank, andSignature Bank. At the time, mainstream media reported that Silvergate's exposure to the crypto industry culminated in insolvency after contagion risk reverberated across the sector following the collapse of FTX in November 2020.

Silvergate grew rapidly alongside the crypto sector during the last bull cycle, with its deposits growing from $1.8 billion at the end of 2019 to $14.3 billion at the end of 2021 — 58% of which came from cryptocurrency exchanges. Court filings reveal the company faced $8 billion in withdrawals after FTX’s collapse, forcing it to sell long-term securities at a loss.

However, the filings also state that Silvergate “did not fail” after suffering the run on its reserves, and was able to repay all customer deposits. Instead, the bank was forced into an “untenable” situation by U.S. regulators.

"[The] sudden regulatory shift made clear that… the Federal Bank Regulatory Agencies would not tolerate banks with significant concentrations of digital asset customers, ultimately preventing Silvergate Bank from continuing its digital asset-focused business model,” Hetrick said.

Hetrick continued the regulatory pressure on banks focused on servicing crypto businesses forced Silvergate Bank into a situation where it would have needed to overhaul its entire business model to continue operating. Reports indicated that regulators demanded the banks reduce their exposure to crypto firms to just 15% of deposits.

Toppled by regulators

Hetrick’s comments appear to confirm the existence of “Operation Choke Point 2.0” — the suspected coordinated effort by U.S. regulatory agencies to isolate the crypto industry from the traditional banking sector.

Nic Carter, the co-founder of Castle Island Ventures, coined the term in February 2023 in response to an increasing regulatory crackdown on financial institutions servicing crypto firms.

The term refers to Operation Choke Point, a controversial initiative launched by the U.S. Department of Justice (DoJ) in 2013, which sought to cut off access to banking services for industries believed to be at “high risk” of fostering illicit activity, including online gambling, pornography, and payday lenders. However, the program was terminated in 2017 following backlash from lawmakers and industry bodies.

“Silvergate died by murder, not suicide,” Carter tweeted in response to Hetrick’s declaration. “The Biden admin directly forced Silvergate out of business, they did not die on their own due to mismanagement or bad trades. They were killed because the Fed said they weren't allowed to service crypto clients as a bank.”

Operation Chokepoint 2.0

Carter said Operation Chokepoint 2.0 began in December 2022 when Senators Elizabeth Warren, John Kennedy, and Roger Marshall sent a letter to Silvergate Bank criticizing the firm for providing services to FTX and Alameda Research and failing to report any suspicious activities concerning the clients. One day later, Signature Bank announced it would halve its deposits from crypto clients, with total deposits falling from $23 billion to $10 billion.

In January 2023, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency published a joint statement warning of the risks associated with banking crypto firms. The Federal Reserve followed up with a statement discouraging banks from holding cryptocurrencies or issuing stablecoins.

Less than one week later, Metropolitan Commercial Bank announced it was shutting down its crypto-related vertical. Applications from Custodia, a digital asset custodian, to join the Federal Reserve system and obtain a master account were also rejected in January 2023.

The Department of Justice then launched an investigation into Silvergate in February 2023. Over the course of the following month, Silvergate, Signature Bank, and Silicon Valley Bank all failed, leaving few U.S. financial institutions willing to provide banking services to crypto firms.

In August, Customers Bancorp, one of the remaining crypto-friendly banks, was targeted by a Federal Reserve enforcement action alleging the firm’s risk management and anti-money laundering processes exhibited significant deficiencies. "The Fed confirmed that Operation Choke Point 2.0 remains in full swing,” tweeted Tyler Winklevoss, the co-founder of the Gemini cryptocurrency exchange.

In March 2023, Cooper & Kirk, a law firm that brought legal action against Operation Chokepoint, argued that Operation Choke Point 2.0 violates the Fifth Amendment.