Hand holding the smartphone in front of the PC screen with the symbol of Silvergate

Silvergate slumps as US senators seek answers on FTX ties

Silvergate Capital’s share price continues to plummet despite its CEO’s public reassurances, while D.C. politicians seek further details on the digital asset-friendly bankers’ ties to the FTX debacle.

As questions mount regarding Silvergate’s dealings with FTX and its affiliated market-maker Alameda Research, Silvergate CEO Alan Lane issued a public letter on Monday intended to “set the record straight.” 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 Sam Bankman-Fried (SBF).

Silvergate built a reputation as one of the few U.S. banks that welcomed ‘crypto’ customers, a “first-mover” status that the bank once claimed offered “numerous strategic advantages.” Until recently, the bank’s website featured a testimonial in which SBF credits Silvergate for having “revolutionized banking for blockchain companies.”

Now, with the collapse of FTX/Alameda and the resulting contagion showing little sign of slowing, doubts have been raised about Silvergate’s own stability, along with suspicions that Silvergate might have been aware that its practices weren’t strictly above board.

In his letter, Lane pushed back against this “speculation and misinformation.” Lane insisted that Silvergate took its risk management and compliance responsibilities “extremely seriously” and assured customers that they retained access to their U.S. dollar deposits.

The Bank Secrecy Act (BSA) and the USA PATRIOT Act require Silvergate “to determine the beneficial owner, the source of funds, and the purpose and expected use of funds.” Lane added that Silvergate monitors accounts for “activity outside of the expected usage,” files suspicious activity reports (SARs) when such activity is observed, and has dedicated “a substantial number” of staff to conducting “effective customer due diligence and monitoring.”

Lane insisted that Silvergate “conducted significant due diligence on FTX and its related entities, including Alameda Research.” Lane noted that Alameda operated an over-the-counter (OTC) trading firm, and anyone engaging in OTC trades with Alameda “would have been instructed by Alameda to send funds to Alameda’s account whether at Silvergate or any of their other banking partners.”

Multiple individuals have claimed, and SBF himself has confirmed, that when dealing with FTX’s OTC desk, they were given wire transfer instructions that listed the beneficiary at Silvergate to be Alameda, not FTX. According to Lane: “When 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.”

Silvergate previously revealed that FTX accounted for roughly 10% of the bank’s nearly $12 billion in deposits by digital asset customers. Lane’s letter assured customers that their deposits “are, and have always been, safely held” and that Silvergate “intentionally carry cash and securities in excess of our digital asset related deposit liabilities.” Lane also urged customers not to fall for the misinformation “being spread by short sellers and other opportunists trying to capitalize on market uncertainty.”

Silvergate investors don’t 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.

Egregious failure(s)

Adding to Silvergate’s downward pressure was a letter addressed to Lane 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’s relationship with “several crypto firms founded by Sam Bankman-Fried,” including FTX, FTX US, and Alameda.

After rehashing SBF’s alleged chicanery, the senators say they are “concerned about Silvergate’s role in these activities because of reports suggesting that Silvergate facilitated the transfer of FTX customer funds to Alameda.”

The letter goes on to state that, as of the end of September, “90 percent of [Silvergate’s] overall deposit base came from crypto firms” and that “over 20% of all loans issued by your bank were made through its “[Silvergate Exchange Network] Leverage” program, which offers “access to capital through U.S. dollar loans collateralized by [BTC].”

With BTC’s fiat value having fallen by around $5,000 between July 30 and Monday, the senators surmise that Silvergate “is now experiencing heightened stress, raising questions about its safety and soundness.” With the possibility that the Federal Reserve system might have to rescue Silvergate using taxpayer funds, “the public deserves to know whether Silvergate has the ability to withstand current and future crypto market volatility.”

The senators note SBF’s post-bankruptcy comments about FTX customers being instructed to wire money to Alameda accounts and that some of these customers continued this practice “as recently as this year.” The senators, therefore, have “questions about the bank’s role in facilitating the improper transfer of FTX customer funds to Alameda.”

In contrast to Lane’s assertions regarding Silvergate’s regulatory compliance, the senators note that “Silvergate’s failure to take adequate notice of this scheme suggests that it may have failed to implement or maintain an effective anti-money laundering program.” Silvergate’s alleged failure to file SARs with the Financial Crimes Enforcement Network (FinCEN) “may constitute yet another violation of the law.”

Plunging the knife deeper, the senators say Silvergate’s role in assisting FTX/Alameda’s subterfuge “appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients.” The public is owed “a full accounting” of what exactly went on, and the senators posed some specific questions it wants Silvergate to answer by December 19.

All in the family

The senators’ questions largely center on what Silvergate knew (and when they knew it) about the incestuous nature of FTX/Alameda’s operations and what steps the bank took based on its knowledge. But the senators also pointedly ask, “why did Silvergate replace Tyler Pearson as Chief Risk Officer.”

Silvergate had previously acknowledged that Pearson—CEO Lane’s son-in-law—served as its Chief Risk Officer. Another son-in-law, Jason Brenier, served as Silvergate’s Manager Correspondent Banking while Lane’s son Chris was the bank’s Chief Technology Officer.

Following FTX’s implosion, Pearson was relegated to the role of deputy Chief Risk Officer, a switch Silvergate told NBC News reflected ‘a shift in functions taken on by a new president at the bank.’ Kathleen Fraher, the bank’s former VP of compliance/BSA officer, has assumed the Chief Risk Officer position.

Silvergate’s response to the senators’ letter stated that the bank considered itself just one of many “victim[s] of FTX’s and Alameda Research’s apparent misuse of customer assets and other lapses of judgment.” Silvergate added that the bank was looking forward to answering the senators’ questions “openly and transparently” to “help set the record straight about our role in the digital asset ecosystem.”

One big insider party!

The government may also want to take a closer look at last month’s disclosure that EOS developer Block.One and its co-founder/CEO Brendan Blumer had become Silvergate’s largest shareholders with a combined 9.3% stake in the bank. (Block.One’s other co-founder was none other than Brock Pierce, who also co-founded the company that launched the controversial Tether stablecoin.)

Last year, forensic financial analysis firm Integra FEC released a report that raised questions about suspected wash-trading during the EOS token’s initial coin offering (ICO) in 2017-18. Block.One later paid a $24 million civil penalty in 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.

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’s home base of the Bahamas, held a press conference in which he tried to downplay his country’s burgeoning reputation as a rules-free “crypto paradise,” stating emphatically that “The Bahamas is a place of laws.”

It’s 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 purchase of a stake in a tiny bank in Washington State for purposes as yet unclear.

Prior to joining Deltec, Pinder was Minister of Financial Services in the Bahamas but stepped down to accept what he described as a “once in a lifetime opportunity” at Deltec. Asked at the time as to what advice he’d give his replacement as finance minister, Pinder suggested being “industry-sensitive.”

However, just one year later, Pinder left Deltec to join local law firm Graham, Thompson & Co, although he stated at the time that he would remain an external consultant to Deltec, describing their ties as “an amicable relationship … and should be for many years to come.”

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’s 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.

Can’t really blame them, as acting after the fact is basically in the job description. Much as it was natural for ‘crypto bros’ to grift like there’s no tomorrow. Thankfully, for many of these crooks, it seems their tomorrow may never come.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, RippleEthereum,
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.

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