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Silvergate Bank: Faces DOJ Probe into FTX Connections

The United States Department of Justice (DoJ) are scrutinizing Silvergate’s relationship with embattled crypto firms FTX and Alameda Research.

The DoJ fraud unit is looking into Silvergate’s hosting of accounts connected to FTX and Alameda Research, according to a source familiar with the matter quoted by Bloomberg.

The crypto-friendly bank plays a crucial role in the industry as its services are used by some of the prominent names such as FTX, Bitstamp, Kraken, Gemini, Circle, Coinbase, Paxos, and

Silvergate Under The Microscope

Since 2019, Silvergate has drawn thousands of customers including crypto exchanges, companies, and leading figures.

The bank reportedly processed billions of dollars each month. Deposits with FTX and multiple companies under founder Sam Bankman-Fried allegedly account for $1 billion of Silvergate’s value.

But the sudden demise of FTX caused brutal changes in the industry. Apart from BlockFi, Silvergate is also an entity that has suffered major losses due to the exposure.

Following the November 2022 crash of FTX, Silvergate reported massive withdrawals from triggered investors, estimated at $8 billion.

In Q4/2022, Silvergate reported that crypto-related deposits were down by 68%. Faced the wave of withdrawals, the bank had to liquidate its assets to pay off debts. This resulted in a loss of $718 million, far more than Silvergate’s total profit since 2013.

In an attempt to maintain its business, the bank also announced a 40% decrease in its employees, corresponding to around 200 positions. Silvergate stated that it would continue to slash costs in order to lower costs.

The business dropped its ambition to establish its own virtual currency, assuming a $196 million loss on technology built by Meta, which came from Diem, Mark Zuckerberg’s failed stablecoin project. Following the announcement of the layoffs, Silvergate shares dropped 40% in premarket trade.

Faced with constant pressure from authorities and politicians, Facebook abandoned its digital money initiative in 2021. And when it came to selecting a company to create USD-based stablecoins, Facebook went straight to Silvergate.

However, the Federal Reserve issued a warning to Silvergate and threatened to freeze the company’s assets. This effectively ended Meta’s blockchain ambitions.

US Lawmakers Active

Senators Elizabeth Warren (D-Mass. ), John Kennedy (R-La. ), and Roger Marshall (R-Kan.) wrote to Silvergate CEO Alan Lane, claiming that the bank had “additionally injected crypto market risk into the traditional banking system” through its dealings with Bankman-Fried and FTX.

Silvergate was sued earlier this year by Silvergate stock investors from November 9, 2021 until January 5, 2023. Silvergate violated the Securities Exchange Act of 1934, according to the petition.

While the DoJ was not charged with any crime, the move demonstrated the regulators’ efforts to better govern the nascent industry. In 2022, the total market value fell by three to less than $1 trillion, ushering in the bear market.

A series of monuments that have collapsed one after the other, such as Terra, Three Arrows Capital, and FTX, are a wake-up call for the regulatory system to step up and put specific oversight.

Despite several crises, the cryptocurrency has seen good improvements, including an increasing number of governments formally recognizing the potential of cryptocurrencies in the face of conflict and rising inflation.

According to several crypto members, the fresh investigation may have an impact on cryptocurrency exchanges linked to Silvergate. Given the bank’s tight relationship with industry players, a new investigation could result in some FUD.

Silvergate CEO Alan Lane, on the other hand, previously indicated that the bank’s status was OK. He highlighted that the bank has taken efforts to guarantee that there was sufficient liquidity to accommodate withdrawal demand.

According to the CEO, the amount of cash is more than the number of deposits related to digital assets. Silvergate also stated that it will continue to look for innovative ways to extract value from its technology assets.

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