Silvergate Knew More About FTX Woes Than It Is Saying, US Senators Say

A group of US senators are seeking new details from Silvergate Capital Corp about its knowledge of the alleged misuse of FTX customer funds. In a letter addressed to Silvergate CEO Alan Lane, lawmakers alleged that the company failed to fully respond to questions about the company’s ties to the collapsing crypto exchange when approached on December 5.

Senators questioned whether Silvergate knew about alleged misuse of FTX customer funds after lawmakers said the company provided an “evasive and incomplete” response to an earlier investigation https://t.co/yTNjxBeS06

— Bloomberg Crypto (@crypto) January 31, 2023

Senators involved in the investigation include well-known cryptocurrency critic Elizabeth Warren (D-Mass), and Republicans Roger Marshall (R-Kansas) and John Kennedy (R-La).

In the letter, the MPs stipulate:

We are disappointed by your evasive and incomplete response to our letter of December 5, 2022, regarding Silvergate’s role in the improper transfer of FTX user funds to Alameda Research. We are writing to seek information about what appears to be a gross failure of your bank’s responsibility to keep a check on and report suspicious financial activity.

Furthermore, the Senators emphasized that both Congress and the public deserve the information necessary to understand Silvergate’s role in the downfall of the FTX scam. The fact that Silvergate turned to Federal Home Loan Bank as its banker of last resort in 2022, lawmakers alleged was simply not an acceptable excuse, and the company must provide an answer.

Former FTX founder Sam Bankman-Fried and other high-level executives, such as FTX co-founder Gary Wang and Alameda Research CEO Caroline Ellison, were accused of fraudulent schemes. The scheme involves billions of dollars in FTX customer funds and its affiliate hedge fund, Alameda Research.

It is alleged the assets were deposited into a subsidiary of Alameda’s Silvergate account called the Northern Dimension, according to the Securities and Exchange Commission. Reportedly, FTX users were asked to transfer funds to Dimension North, a fake electronics retailer, to hide the fact that the funds were being used for an Alameda investment.

The Silvergate platform previously declined to respond to FTX-related questions raised by lawmakers, citing restrictions on “disclosing confidential surveillance information,” according to the letter.

However, the former chief innovation officer of Federal Deposit Insurance, Sultan Meghji, confirm via Twitter that banks cannot disclose confidential surveillance information. In some cases, they can be held accountable for criminal acts if they do – even if requested by Congress. Meghji further stipulates that:

It’s no surprise that platforms (or any other bank) would use the rule to avoid responding to Congressional questionnaires. Congress should work with banking regulators to obtain this information.

Silvergate Under Pressure

Silvergate has been under increasing pressure in recent months. In early January, Silvergate disclosed that it had $4.3 billion in short-term Federal Home Loan Bank advances and approximately $4.6 billion in cash and cash equivalents by the end of 2022. John Stark, LLC consultant revealed via Twitter that the funding allowing the company to prevent the run of deposits after FTX’s death. Silvergate is one of several crypto-friendly banks that relies on a program originally set up under President Herbert Hoover to support mortgage lending.

Crypto-friendly bank Silvergate received a $4.3 billion loan from Federal Home Loan Bank to prevent a bank run. US taxpayers are now officially subsidizing crypto scams/grifts in the first US crypto bailout, all in plain view. So that’s how freedom dies.https://t.co/G4VKSsLV7w

— John Reed Stark (@JohnReedStark) January 11, 2023

Additionally, a class action lawsuit was filed against Silvergate on December 14 for its alleged role in transferring FTX customer funds to trading firm Alameda Research. The class action filed on behalf of all buyers of Silvergate securities, in which Lane and chief financial officer, Antonio Martino, are listed as defendants.

Missing Details

Silvergate was responding to the senators’ original December letter establishing that Alameda opened an account with the company in 2018, prior to the founding of the stock exchange company, FTX. The bank further noted that they are currently reviewing transactions related to the FTX and Alameda accounts.

In December, Lane confirmed that Silvergate performs significant due diligence on the crypto exchange and its associated entities during the onboarding process and through ongoing monitoring.

In the most recent letter, US senators blamed Silvergate for withholding critical information needed by Congress to assess the extent of the platform’s responsibility for improper transfers of FTX customer funds to Alameda.” The senators also alleged that they needed to determine any non-compliance issues by banks or auditors that could lead to the fraud claimed.

In a new chapter of the investigation, senators have asked Silvergate to answer a series of questions. Some of the questions included whether the bank was aware of FTX directing its users to transfer funds to Alameda’s account at Silvergate. Another investigation is whether suspicious transactions are suspected.

The senators next asked for details about the company’s due diligence practices, how it plans to leverage proceeds from the FHLB loan, and the results of reviews conducted by the Fed and independent auditors. However, Silvergate has until February 13 to respond to the question.

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