Thursday, May 30, 2024

Kennedy, Warren, Marshall call on Silvergate to release all records on improper FTX transfer

by BIZ Magazine

WASHINGTON – Sen. John Kennedy (R-La.), ranking member of the Senate Banking Subcommittee on Economic Policy, and Sens. Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) wrote to Silvergate, the bank that reportedly facilitated the transfer of FTX customer funds to Alameda Research, seeking answers about the bank’s role in the loss of billions of customer dollars. 

“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. 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,” wrote the senators.

Silvergate caters to digital asset clients—as of September 30, 90% of its overall deposit base came from crypto firms operating in a highly volatile market. The senators note that Silvergate’s average deposits quarter-to-date are down more than $2 billion since the end of September. In the past month, two of Silvergate’s digital assets clients—FTX and its affiliates and BlockFi—have declared bankruptcy.

In September, Silvergate asserted that its “relationship with FTX [and its related entities] is limited to deposits.” While Silvergate failed to explain what it meant by “related entities,” documents from FTX’s bankruptcy case confirmed that the bank had relationships with several firms controlled by FTX’s former CEO Sam Bankman-Fried, including Alameda, which is the crypto trading firm that Bankman-Fried claimed was a “wholly separate entity” from FTX. 

“Mr. Bankman-Fried has, himself, admitted that FTX customer funds were improperly transferred to Alameda’s bank accounts. When asked how FTX customer deposits ended up in Alameda’s accounts, Mr. Bankman-Fried told Vox that the company did not originally have a bank account, and so it directed customers to wire money to Alameda’s account with Silvergate in exchange for assets on FTX. According to Mr. Bankman-Fried, executives at the company ‘forgot’ about this scheme until the company imploded,” explained the senators.

This arrangement between FTX and Alameda relied on Silvergate’s depository services, and Alameda’s depository account with Silvergate appears to be at the center of improper transfers of customer funds.

The senators note that Silvergate’s failure to take notice of and report this scheme could constitute violations of the law—including a failure to implement or maintain an effective anti-money laundering program as required under the Bank Secrecy Act and a failure to report suspicious transactions to the Financial Crimes Enforcement Network. 

Given these concerns about Silvergate’s failure to apply extensive review processes to FTX and Alameda, and the possible role the bank may have played in the loss of billions of dollars of customer funds, the senators are asking Silvergate to answer a set of questions by Dec. 19, 2022. The questions will help provide the public with a full accounting of Silvergate’s relationship with FTX and Alameda and information about its safety and soundness.

The full letter is available here.

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