La Jolla-based Silvergate Capital has made a name for itself in recent years as one of several traditional banks providing deposit, fund transfer, security and other services to the cryptocurrency trading market.
But two high-profile crypto-exchange bankruptcies — one of which allegedly involved fraud — have rattled the small financial institution’s stock and caught the attention of lawmakers.
Silvergate’s stock price closed Dec. 14 at $18.71 a share on the New York Stock Exchange, down 88 percent from a 12-month peak of $162.87 last December.
Silvergate’s main business is facilitating payments between crypto hedge funds and crypto exchanges.
U.S. Sen. Elizabeth Warren, D-Mass, and two other senators last week sent a letter to Silvergate CEO Alan Lane raising questions about the California bank’s safeguards regarding the accounts of crypto exchange FTX and its sister trading firm Alameda Research.
“Your bank’s involvement in the transfer of FTX customers’ funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor and report suspicious financial activities conducted by its customers,” said the letter, which was also signed by Republicans John Kennedy of Louisiana and Roger Marshall of Kansas. Warren and Kennedy are members of the Senate Banking Committee.
“The public is owed a full accounting of the financial activities that may have resulted in the loss of billions in client assets and any role that Silvergate may have played in those losses,” the senators wrote.
The letter calls on Silvergate to provide answers to a series of specific questions by Monday, December 19.
Silvergate said in a statement that it plans to comply with the senators’ requests within its legal limitations.
“As a regulated bank, we remain committed to our Bank Secrecy Act/Anti-Money Laundering obligations and look forward to answering Senator Warren’s questions as openly and transparently as possible,” the statement said.
Lane responded separately in a Dec. 5 letter to the bank’s shareholders: “It has been a very difficult few weeks for the digital asset industry as we all come to terms with the apparent misappropriation of client assets and other lapses in judgment by FTX. and Alameda Research.”
But Lane claimed that Silvergate did “significant due diligence” and continuously monitored the FTX and Alameda Research bank accounts, managing wire transfers according to the sender’s instructions and industry practice.
He added that short sellers are spreading misinformation about the bank’s role in spotting the FTX/Alameda problem. Interest in the stock from short sellers, who are betting the price will fall, rose 97 percent in November compared with October.
FTX collapsed last month and filed for Chapter 11 bankruptcy. Its financial health came into question after allegations of poor financial controls that led to clients’ funds being funneled into risky Alameda Research investments without their knowledge.
The potential losses for investors are unclear, but could be in the billions. FTX founder Sam Bankman-Fried, who also allegedly controlled Alameda Research, was arrested on December 12 in the Bahamas. On December 13, the US Securities and Exchange Commission filed civil charges against Bankman-Fried for fraud.
David Chiaverini, an analyst at Wedbush Securities, said Silvergate could face a fine from regulators as well as a class-action lawsuit by FTX clients or investors who lost money. He said he thinks those scenarios could be expensive but doable for the bank.
Silvergate shareholders have already filed at least two lawsuits alleging the bank made misleading statements to its investors. Both are seeking class action status.
In a research report published last month, Chiaverini wrote that he did not think Silvergate was to blame for FTX’s handling of the funds.
“Silvergate did what banks do – it enabled payments between two willing parties where neither party was involved in the transaction [a U.S.] list of sanctions or other list of restrictions, nor were the payments abnormal for the companies in which the parties operate,” Chiaverini wrote.
“Alameda Research is a large crypto hedge fund and FTX is a large crypto exchange,” he said, “so it’s natural for Silvergate to provide payment services to each of them.”
Volatility in crypto markets began last summer as investors sought to reduce risk amid economic headwinds and digital currency prices plummeted.
The value of Bitcoin, the most famous digital currency, has fallen 64 percent from its peak in 2022. Digital currency lender BlockFi went bankrupt after the FTX implosion.
Silvergate itself does not own or trade cryptocurrency. It provides many of the traditional banking services — including deposit services, fund transfers, 24/7 US dollar transaction facilitation, customer account control and security — needed to enable digital currency trading.
The result is a growing pool of interest-free deposits that the bank can then use to finance loans or invest in other interest-bearing instruments – mostly from institutional traders. At its peak, Silvergate’s deposits reached about $12 billion.
Along with bankruptcies and other turmoil, about $1.9 billion of Silvergate deposits had left the bank by the end of September.
Silvergate says it has enough liquidity to deal with the downturn. Its total deposits by mid-November amounted to 9.8 billion dollars. Daily use of its US dollar exchange services for crypto traders has not slowed down, according to the bank.
“We intentionally carry cash and securities in excess of our deposit liabilities associated with digital assets,” Lane said in a statement. “We have deliberately built this business to support our clients not only during periods of growth, but also during periods of volatility. That is, our business is designed to adjust the inflow and outflow of deposits under different market conditions.” ◆