Silvergate Capital loses $1 billion, Signature Bank’s Binance ties exposed

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Silvergate Capital Corporation (NASDAQ: SI) lost $1 billion in the final quarter of 2022, while Signature Bank’s (NASDAQ: SBNY) undisclosed ties to the controversial Binance exchange could result in even greater damage.

On Tuesday, the California-based Silvergate reported a net loss of $1 billion in the three months ending December 31, 2022, a sharp turnaround from the $40.6 million profit Silvergate booked in Q3 2022 and the $18.4 million profit in Q4 2021.

Silvergate blamed the loss on the digital asset industry undergoing “a transformational shift, with significant overleverage in the industry, leading to several high-profile bankruptcies.” Average deposits of Silvergate’s digital asset clients were $7.3 billion in Q4, down from $12 billion in Q3. Fees earned from digital asset clients in Q4 were $6.6 million, down from $7.9 million in Q3 and from $9.3 million in Q4 2021.

Silvergate said it’s taking some “decisive actions” to deal with “a sustained period of lower deposits,” including “the difficult decision to substantively reduce its workforce.” Earlier this month, Silvergate announced plans to trim its payroll by around 40%, representing some 200 positions, the latest in a surge of crypto companies kicking staff to the curb.

Silvergate also sold $5.2 billion of debt securities in Q4 based on its need to raise cash quickly to cover the flood of customer withdrawals, resulting in a loss of $718 million. Despite these setbacks, CEO Alan Lane insists that he continues to “believe in the digital asset industry” and the bank’s “mission has not changed.”

Also largely unchanged is Silvergate’s share price, which initially shot up to nearly $17 on Tuesday before closing at $13.33, about where it started the day. That’s half of what the shares were worth before FTX filed for bankruptcy and a mere fraction of their $222 peak in November 2021.

Silvergate’s FTX hangover

The Q4 numbers were up slightly for the Silvergate Exchange Network (SEN), which offers real-time transaction settlement (in USD/Euros) outside traditional ‘banking hours’ for the bank’s digital asset and institutional clients. Transfers to/from exchanges via SEN rose 4% from Q3 to $117.1 billion in Q4.

SEN also offers USD loans collateralized by the BTC token, and these accounted for over one-fifth of all loans issued by Silvergate. But total SEN’ leverage commitments’ fell from $1.5 billion in Q3 to $1.15 billion in Q4, which promises to take a big bite out of Silvergate’s future revenue.

Silvergate’s former “crypto” clients included Sam Bankman-Fried (SBF), whose FTX/Alameda Research empire was forced into bankruptcy in November when his addiction to fraud could no longer be hidden from view.

SBF made full use of SEN, with the FTX/Alameda family holding some 20 different Silvergate accounts. In a testimonial that formerly appeared on the Silvergate site, SBF declared that “life as a crypto firm can be divided up into before Silvergate and after Silvergate.” SBF praised Silvergate for “how much it revolutionized banking for blockchain companies.”

SBF’s dealings with Silvergate led to a class action suit against the bank by some aggrieved former FTX customers, who believe Silvergate’s “business operations and interests were tightly entwined” with those of FTX/Alameda.

Silvergate’s ties to FTX/Alameda also attracted the attention of U.S. politicians interested in whether the bank “facilitated the transfer of FTX customer funds to Alameda.” FTX customers were often directed to wire deposits to accounts under Alameda’s control (sometimes via a stopover at a fake electronics retailer). But instead of forwarding these deposits to FTX, Alameda used the cash to paper over the holes on its balance sheet, ultimately leaving FTX unable to meet customers’ withdrawal requests.

The extent to which Silvergate managers may have been aware of SBF’s skullduggery remains unknown, although this is something the U.S. senators appear keen on determining. These pols have highlighted Silvergate’s apparent reluctance to file suspicious activity reports (SARs) regarding FTX with the Financial Crimes Enforcement Network (FinCEN), as well as why CEO Lane chose to demote his son-in-law Tyler Pearson from the role of Chief Risk Officer in the wake of FTX’s bankruptcy.

Silvergate didn’t always appear so willing to flout U.S. edicts, having famously discontinued deposits and withdrawals for Binance in May 2021. This followed reports of investigations into Binance’s well-documented nefarious activities by multiple U.S. federal agencies, as well as the revelation that the Binance US offshoot was established as a regulatory decoy while Binance.com continued to serve U.S. customers.

As we shall see, while Silvergate may have been willing to cut ties with Binance, some of its competitors appear to have followed a different path.

Signature doesn’t know or doesn’t care about Binance ties

Also releasing its Q4 results on Tuesday was New York-based Signature Bank, which reported a net income of $300.8 million, up from $272 million in Q4 2021. Signature’s shares have also tumbled from their November 2021 peak to around one-third of that value today but closed Tuesday up 2.4%.

Like its smaller rival Silvergate, Signature is ‘crypto friendly,’ with digital asset businesses accounting for nearly one-quarter of total deposits at the end of last September. But following FTX’s bankruptcy, CEO Joe DePaolo announced that the bank was “not just a crypto bank, and we want that to come across loud and clear.”

FTX was a Signature client, and SBF gave Signature a glowing testimonial last April. Regardless, FTX’s downfall led Signature to pledge to reduce crypto’s share of deposits to as little as 15% (and possibly even lower). The Q4 stats show digital asset deposits fell by $7.35 billion from the previous quarter, representing more than half the bank’s total Q4 deposit decline.

Like Silvergate, Signature has its own digital payments platform called Signet. A host of digital asset firms have utilized its services since its 2019 launch, including FTX and other exchanges such as the U.S.-based Coinbase (NASDAQ: COIN), as well as Circle, with which Coinbase has partnered on the USDC stablecoin. But until recently, few suspected that Binance.com would be among Signet’s more notable users.

For some time now, the Binance.com mothership has listed Signet as a means of funding one’s Binance account with U.S. dollars. While Binance received funds via Signet, the listed recipient of these transfers was something called Key Vision Development Limited.

A shell company under that name was registered in Seychelles in December 2020, around the time that Binance.com originally signed up with Silvergate. Binance customers whose withdrawals experienced some kind of hiccup reported receiving reports from their local banks that the funds were returned to the sender, aka Key Vision.

When Silvergate gave Binance the heave-ho in May 2021, Binance appeared to have transferred its affections to Signature via Key Division. This relationship appears intact, despite Key Vision having been struck off the Seychelles register in September 2021.

Meanwhile, a Key Division Development Limited LLC was registered by parties unknown in the state of Wyoming on October 6, 2022. It’s unclear why a company with ‘limited’ in its name would redundantly append the acronym of ‘limited liability corporation.’ Perhaps it was filed with the usual disdain for convention and/or detail that crypto bros often display.

(It’s worth noting that Wyoming is home to Senator Cynthia Lummis (R), a staunchly pro-crypto politician who has lent her name to pieces of federal crypto legislation over the years. Wyoming is also front and center when it comes to rolling out the regulatory welcome mat for digital asset companies.)

While nobody on Signature’s post-earnings analyst call mentioned Binance, others have reacted to this unholy trinity of Binance-Key Vision-Signet by wondering what happened to the “stringent due diligence” that Signature claims to perform when deciding who to onboard as a Signet client. Particularly given that Binance has been accused of countless crimes, including allowing Iranian crypto traders to dodge U.S. economic sanctions, something no U.S. banker wishes to be identified as assisting.

John Reed Stark, a former director of enforcement at the U.S. Securities and Exchange Commission (SEC), suggested this week that federal and state regulatory bodies should be swarming all over Signature’s offices “asking questions/demanding documents/interviewing bank officials/examining records/etc. to review risk issues and determine if there is money laundering or any other crime occurring. Now.”

No fortune tellers here

On Tuesday’s earnings call, Signature CEO DePaolo was asked about the Signet platform’s future. DePaolo said, “we’re not necessarily exiting client relationships there, but we are lower in concentrations there…ultimately, all we’re doing is limiting the amount that clients can maintain in overall deposits at our institution.”

DePaolo was also asked about Signature’s dealings with FTX. DePaolo insisted that “everyone thought [SBF] was legitimate, and he ended up being very Madoff-like. So, I don’t think anyone could say that they knew that, and we [caught] it.”

DePaolo noted that Congress was working on virtual currency-related measures “to get some laws put on the books for regulation.” When these rules are implemented, DePaolo believes it “will eliminate a number of players” who won’t be able to comply, “whether it’s capital related or just doing [anti-money laundering/Bank Secrecy Act].” Binance fits that description to a ‘T,’ but it’s not yet clear that DePaolo is willing to acknowledge that reality.

Last week, the U.S. Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement warning banks of the risks of dipping their toes into the fetid crypto pool.

One thing DePaolo won’t be able to say when Signature’s Binance ties blow up in his face is that he wasn’t warned.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.