\n<\/p>\n
Silvergate Capital\u2019s share price continues to plummet despite its CEO\u2019s public reassurances, while D.C. politicians seek further details on the digital asset-friendly bankers\u2019 ties to the\u00a0FTX<\/a>\u00a0debacle.<\/p>\n As questions mount regarding Silvergate\u2019s dealings with FTX and its affiliated market-maker\u00a0Alameda Research<\/a>, Silvergate CEO Alan Lane issued a\u00a0public letter<\/a>\u00a0on Monday intended to \u201cset the record straight.\u201d Lane sought to dampen speculation that the financial institution may have some deeper connection to the criminality allegedly perpetrated by its former clients FTX\/Alameda and their founder\u00a0Sam Bankman-Fried<\/a>\u00a0(SBF).<\/p>\n Silvergate built a reputation as one of the few U.S. banks that\u00a0welcomed \u2018crypto\u2019 customers<\/a>, a \u201cfirst-mover\u201d status that the bank once claimed offered \u201cnumerous strategic advantages.\u201d Until recently, the bank\u2019s website featured a testimonial in which SBF credits Silvergate for having\u00a0\u201crevolutionized banking for blockchain companies.\u201d<\/a><\/p>\n Now, with the\u00a0collapse of FTX\/Alameda<\/a>\u00a0and the\u00a0resulting contagion<\/a>\u00a0showing little sign of slowing, doubts have been raised about Silvergate\u2019s own stability, along with suspicions that Silvergate might have been aware that its practices weren\u2019t strictly above board.<\/p>\n In his letter, Lane pushed back against this \u201cspeculation and misinformation.\u201d Lane insisted that Silvergate took its risk management and compliance responsibilities \u201cextremely seriously\u201d and assured customers that they retained access to their U.S. dollar deposits.<\/p>\n The Bank Secrecy Act (BSA) and the USA PATRIOT Act require Silvergate \u201cto determine the beneficial owner, the source of funds, and the purpose and expected use of funds.\u201d Lane added that Silvergate monitors accounts for \u201cactivity outside of the expected usage,\u201d files suspicious activity reports (SARs) when such activity is observed, and has dedicated \u201ca substantial number\u201d of staff to conducting \u201ceffective customer due diligence and monitoring.\u201d<\/p>\n Lane insisted that Silvergate \u201cconducted significant due diligence on FTX and its related entities, including Alameda Research.\u201d Lane noted that Alameda operated an over-the-counter (OTC) trading firm, and anyone engaging in OTC trades with Alameda \u201cwould have been instructed by Alameda to send funds to Alameda\u2019s account whether at Silvergate or any of their other banking partners.\u201d<\/p>\n Multiple individuals<\/a>\u00a0have claimed, and SBF himself\u00a0has confirmed<\/a>, that when dealing with FTX\u2019s OTC desk, they were given wire transfer instructions that listed the beneficiary at Silvergate to be Alameda, not FTX. According to Lane: \u201cWhen Silvergate received payments directed to Alameda Research and credited it to the account of the same name, this was consistent with the instructions from the sender of the wire and industry practice.\u201d<\/p>\n Silvergate previously revealed that FTX accounted for roughly 10% of the bank\u2019s nearly $12 billion in deposits by digital asset customers. Lane\u2019s letter assured customers that their deposits \u201care, and have always been, safely held\u201d and that Silvergate \u201cintentionally carry cash and securities in excess of our digital asset related deposit liabilities.\u201d Lane also urged customers not to fall for the misinformation \u201cbeing spread by short sellers and other opportunists trying to capitalize on market uncertainty.\u201d<\/p>\n Silvergate investors don\u2019t appear to have gotten the message, as the stock closed Tuesday down another 4.5% to just $23.14. At this point in December 2021, Silvergate was trading above $150, but even that was well off its $217 peak just one month prior when the overall digital asset mark reached unprecedented (and unwarranted) heights.<\/p>\n Egregious failure(s)<\/strong><\/p>\n Adding to Silvergate\u2019s downward pressure was\u00a0a letter addressed to Lane<\/a> on Monday by U.S. Senators Elizabeth Warren (D-MA), John Kennedy (R-LA), and Roger Marshall (R-KS). The letter seeks further information regarding Silvergate\u2019s relationship with \u201cseveral crypto firms founded by Sam Bankman-Fried,\u201d including FTX, FTX US, and Alameda.<\/p>\n After rehashing SBF\u2019s alleged chicanery, the senators say they are \u201cconcerned about Silvergate\u2019s role in these activities because of reports suggesting that Silvergate facilitated the transfer of FTX customer funds to Alameda.\u201d<\/p>\n The letter goes on to state that, as of the end of September, \u201c90 percent of [Silvergate\u2019s] overall deposit base came from crypto firms\u201d and that \u201cover 20% of all loans issued by your bank were made through its \u201c[Silvergate Exchange Network] Leverage\u201d program, which offers \u201caccess to capital through U.S. dollar loans collateralized by [BTC<\/a>].\u201d<\/p>\n With BTC\u2019s fiat value having fallen by around $5,000 between July 30 and Monday, the senators surmise that Silvergate \u201cis now experiencing heightened stress, raising questions about its safety and soundness.\u201d With the possibility that the Federal Reserve system might have to rescue Silvergate using taxpayer funds, \u201cthe public deserves to know whether Silvergate has the ability to withstand current and future crypto market volatility.\u201d<\/p>\n The senators note SBF\u2019s post-bankruptcy comments about FTX customers being instructed to wire money to Alameda accounts and that some of these customers continued this practice \u201cas recently as this year.\u201d The senators, therefore, have \u201cquestions about the bank\u2019s role in facilitating the improper transfer of FTX customer funds to Alameda.\u201d<\/p>\n In contrast to Lane\u2019s assertions regarding Silvergate\u2019s regulatory compliance, the senators note that \u201cSilvergate\u2019s failure to take adequate notice of this scheme suggests that it may have failed to implement or maintain an effective anti-money laundering program.\u201d Silvergate\u2019s alleged failure to file SARs with the Financial Crimes Enforcement Network (FinCEN) \u201cmay constitute yet another violation of the law.\u201d<\/p>\n Plunging the knife deeper, the senators say Silvergate\u2019s role in assisting FTX\/Alameda\u2019s subterfuge \u201cappears to be an egregious failure of your bank\u2019s responsibility to monitor for and report suspicious financial activity carried out by its clients.\u201d The public is owed \u201ca full accounting\u201d of what exactly went on, and the senators posed some specific questions it wants Silvergate to answer by December 19.<\/p>\n All in the family<\/strong><\/p>\n The senators\u2019 questions largely center on what Silvergate knew (and when they knew it) about the incestuous nature of FTX\/Alameda\u2019s operations and what steps the bank took based on its knowledge. But the senators also pointedly ask, \u201cwhy did Silvergate replace Tyler Pearson as Chief Risk Officer.\u201d<\/p>\n Silvergate had\u00a0previously acknowledged<\/a>\u00a0that Pearson\u2014CEO Lane\u2019s son-in-law\u2014served as its Chief Risk Officer. Another son-in-law, Jason Brenier, served as Silvergate\u2019s Manager Correspondent Banking while Lane\u2019s son Chris was the bank\u2019s Chief Technology Officer.<\/p>\n Following FTX\u2019s implosion, Pearson was relegated to the role of deputy Chief Risk Officer, a switch Silvergate told\u00a0NBC News<\/a>\u00a0reflected \u2018a shift in functions taken on by a new president at the bank.\u2019 Kathleen Fraher, the bank\u2019s former VP of compliance\/BSA officer, has assumed the Chief Risk Officer position.<\/p>\n Silvergate\u2019s response to the senators\u2019 letter stated that the bank considered itself just one of many \u201cvictim[s] of FTX\u2019s and Alameda Research\u2019s apparent misuse of customer assets and other lapses of judgment.\u201d Silvergate added that the bank was looking forward to answering the senators\u2019 questions \u201copenly and transparently\u201d to \u201chelp set the record straight about our role in the digital asset ecosystem.\u201d<\/p>\n One big insider party!<\/strong><\/p>\n The government may also want to take a closer look at\u00a0last month\u2019s disclosure<\/a>\u00a0that\u00a0EOS<\/a>\u00a0developer Block.One and its co-founder\/CEO Brendan Blumer had become Silvergate\u2019s largest shareholders with a combined 9.3% stake in the bank. (Block.One\u2019s other co-founder was none other than\u00a0Brock Pierce<\/a>, who also co-founded the company that launched the controversial\u00a0Tether<\/a>\u00a0stablecoin.)<\/p>\n Last year, forensic financial analysis firm Integra FEC released a report that raised questions about\u00a0suspected wash-trading during the EOS token\u2019s initial coin offering<\/a>\u00a0(ICO) in 2017-18. Block.One later\u00a0paid a $24 million civil penalty<\/a>\u00a0in a settlement with the U.S. Securities and Exchange Commission for offering unregistered securities via this ICO. Block.One also paid $27.5 million to settle a class action suit brought by EOS token holders who accused the company of issuing misleading statements to artificially inflate the EOS price during the ICO.<\/p>\n The ties that bind digital asset firms and banks are coming under increased focus, with new revelations seemingly every day. Last month, Ryan Pinder, Attorney General and Minister of Legal Affairs in FTX\u2019s home base of the Bahamas, held\u00a0a press conference<\/a>\u00a0in which he tried to downplay his country\u2019s burgeoning reputation as a rules-free \u201ccrypto paradise,\u201d stating emphatically that \u201cThe Bahamas is a place of laws.\u201d<\/p>\n It\u2019s worth noting that, before assuming his AG role in September 2021, Pinder held a variety of private sector positions, including Head of Wealth Management and Chief Legal Officer at Deltec Bank & Trust, whose major clients later included not only FTX but also Tether. FTX and Deltec were recently linked to the questionable\u00a0purchase of a stake in a tiny bank in Washington State<\/a> for purposes as yet unclear.<\/p>\n Prior to joining Deltec, Pinder was Minister of Financial Services in the Bahamas but stepped down to accept what he described as a \u201conce in a lifetime opportunity\u201d at Deltec. Asked at the time as to what advice he\u2019d give his replacement as finance minister, Pinder\u00a0suggested<\/a>\u00a0being \u201cindustry-sensitive.\u201d<\/p>\n However, just one year later, Pinder left Deltec to join local law firm Graham, Thompson & Co, although he\u00a0stated at the time<\/a>\u00a0that he would remain an external consultant to Deltec, describing their ties as \u201can amicable relationship \u2026 and should be for many years to come.\u201d<\/p>\n The sketchier corners of the digital asset sector have been reeling ever since the market meltdown began in earnest this spring. But the implosion of FTX and SBF\u2019s thoroughly misguided decision to embark on a ham-fisted media apology tour is offering ever greater incentives to media-hungry politicians eager to be seen slamming the barn door shut long after the cows have bolted.<\/p>\n Can\u2019t really blame them, as acting after the fact is basically in the job description. Much as it was natural for \u2018crypto bros\u2019 to grift like there\u2019s no tomorrow. Thankfully, for many of these crooks, it seems their tomorrow may never come.<\/p>\n Follow\u202fCoinGeek\u2019s Crypto Crime Cartel<\/a>\u202fseries, which delves into the stream of groups\u2014from\u202fBitMEX<\/a>\u202fto\u202fBinance<\/a>,\u202fBitcoin.com<\/a>,\u202fBlockstream<\/a>,\u202fShapeShift<\/a>,\u202fCoinbase<\/a>,\u202fRipple<\/a>,\u00a0Ethereum<\/a>, New to Bitcoin? Check out CoinGeek\u2019s\u00a0<\/i><\/b>Bitcoin for Beginners<\/i><\/b><\/a>\u00a0section, the ultimate resource guide to learn more about Bitcoin\u2014as originally envisioned by Satoshi Nakamoto\u2014and blockchain.<\/i><\/b><\/p>\n<\/div>\n
FTX\u202f<\/a>and\u202fTether<\/a>\u2014who have co-opted the digital asset revolution and turned the industry into a minefield for na\u00efve (and even experienced) players in the market.<\/em><\/p>\n