Dec 6, 2022

Crypto Bank Silvergate Asked by US Senators to Explain FTX Ties

Matt Turner, Bloomberg News

Senator Elizabeth Warren, a Democrat from Massachusetts, speaks during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Nov. 30, 2021. The Federal Reserve chair, in his first public remarks on the omicron variant of the coronavirus, said it poses risks to both sides of the central bank's mandate to achieve stable prices and maximum employment. , Bloomberg

(Bloomberg) -- Crypto bank Silvergate Capital Corp. was asked by three US Senators to release all records related to transfers of funds for the collapsed FTX empire of Sam Bankman-Fried.

“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” Senators Elizabeth Warren, Roger Marshall and John Kennedy wrote in a letter released Tuesday. “The public is owed a full accounting of the financial activities that may have led to the loss of billions in customer assets, and any role that Silvergate may have played in these losses.”

Shares of the La Jolla, California-based bank fell as much as 8%. The slide extends Silvergate’s losses on the year to more than 84% and has it trading at a fresh 52-week low.

The letter cites concerns about the banking services that Silvergate provided to both FTX as well as Bankman-Fried’s trading firm, Alameda Research. It says the arrangement between FTX and Alameda depended on Silvergate’s depository services and puts the bank “at the center of the improper transmission of FTX customer funds.”

“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, as required under the Bank Secrecy Act,” the Senators said.

A representative for Silvergate Capital had no immediate comment.

‘Significant questions’

Prior to the letter’s release, Silvergate Chief Executive Alan Lane published his own letter in an attempt to quell growing investor concerns about the bank in the wake of what he called “speculation and misinformation” being circulated by short sellers. “While this has been a turbulent time in the digital asset industry, our customers’ deposits are, and have always been, safely held,” Lane said.

Lane once again also addressed the bank’s relationship with FTX and Alameda Research saying that they had “conducted significant due diligence” on both entities “both during the onboarding process and through ongoing monitoring.” Last month Lane told investors that FTX represented less than 10% of all digital asset deposits.

Still, the inquiry from lawmakers “raises some fairly significant questions regarding Silvergate’s compliance with the anti-money laundering laws, including the know your customer rules and the OFAC list, as well as the suspicious activity report rules,” said Jerry Comizio, an adjunct law professor at American University.

Any issue with the bank may depend on “what Alameda told Silvergate the purpose of the account was and if those wires were in line with the bank’s expectations,” according to Alma Angotti, a former enforcer with the US Securities and Exchange Commission and US Treasury Department who now works as a partner at the consulting firm Guidehouse.

Silvergate shares have been under pressure for much of this year as prices of digital assets including Bitcoin have plunged but the collapse of FTX has ratcheted up the intensity in recent weeks. The stock has fallen nearly 60% since the end of October. It’s not alone either, with other crypto-exposed stocks including Coinbase Global Inc. and Marathon Digital Holdings Inc. falling at least 80% in 2022.

The recent selloff, however, has driven an influx of interest from short sellers. Short interest as a percentage of free float has surged to more than 28%, according the S3 Partners data compiled by Bloomberg, up from roughly 10% prior to FTX’s bankruptcy.

The turbulence is also starting to catch the attention of Wall Street. Morgan Stanley analyst Manan Gosalia downgraded the company on Monday, saying “ongoing stress in the crypto ecosystem drives a wide range of risks for Silvergate.”

Still, not everyone has soured on the stock. Cathie Wood’s Ark Investment Management has snapped up more than 200,000 Silvergate shares over the last month, worth about $5 million based on Tuesday’s trading price. Wood has long been a vocal supporter of the broader crypto space and last month reiterated her forecast that Bitcoin will reach $1 million by 2030. The virtual currency traded around $17,000 on Tuesday.

--With assistance from Max Reyes and Yueqi Yang.

(Updates with no immediate comment from Silvergate in the sixth paragraphs and comments from Comizio and Angotti starting in the ninth paragraph.)