U.S. SENATORS FOCUS ON S.D. BANK
Lawmakers want a better explanation of Silvergate’s role in FTX fund transfers
U.S. lawmakers sent a second letter to La Jolla’s Silvergate Bank on Monday demanding additional answers about its role in the transfer of customer funds in the highprofile collapse of cryptocurrency exchange FTX.
Sen. Elizabeth Warren, a Democrat, joined Republican Sens. John Kennedy and Roger Marshall in probing why Silvergate’s anti-money laundering compliance program failed to red flag improper transfers of FTX customer funds to Alameda Research — a sister FTX company.
Both FTX and Alameda had deposit accounts at Silvergate, which specializes in providing traditional banking services to the crypto industry such as deposits, fund transfers and a real-time payments system that enables institutional investors to move U.S. dollars into and out of digital currency trading networks.
This latest demand from lawmakers — two of whom serve on the Senate Banking Committee — comes on top of an initial letter sent to Silvergate Chief Executive Alan Lane on Dec. 5.
At that time, the senators sought answers to a number of questions surrounding Silvergate’s compliance with the Bank Secrecy Act and other know-your-customer banking requirements.
Silvergate responded with “several important, and in some cases, new pieces of information,” according to lawmakers. But they also found the disclosures evasive and inadequate for Congress to understand what happened and whether it potentially poses a risk to the banking system.
“They reveal that Silvergate had risk management and due diligence processes in place — but they did, in fact, fail miserably,” according to the letter. “They reveal that neither the Federal Reserve nor Silvergate’s independent auditors were able to identify what we now know were extraordinary gaps in Silvergate’s due diligence process.”
In an email to the Union-Tribune, Silvergate said the bank has a “robust compliance and risk management program.”
“In accordance with its risk management policies and procedures, Silvergate conducted significant due diligence on FTX and its related entities, including Alameda Research,” the bank said.
Following FTX’s collapse in November, Silvergate saw a run on its deposits, which plunged from $11.9 billion to $3.8 billion in the fourth quarter.
The bank lost $1 billion in the quarter, as it was forced to sell debt securities intended to be held to
maturity earlier than planned to cover deposit withdrawals. It also laid off 181 workers in San Diego to trim expenses.
At year-end, Silvergate held cash or equivalents of $4.6 billion, which exceeds the $3.8 billion in deposits remaining from crypto customers, according to the bank.
Silvergate also received $4.3 billion in short-term advances from the Federal Home Loan Bank of San Francisco. The senators called out the FHLB loan as having the potential to leave taxpayers “holding the bag” should Silvergate fail.
“By using the FHLB as its functional lender of last resort, Silvergate has further
introduced crypto market risk into the traditional banking system,” wrote lawmakers.
Silvergate still has debt securities valued at $5.6 billion available for sale. It characterized the FHLB loan as wholesale borrowings intended to provide short-term liquidity. It plans to sell a portion of its holdings — made up mostly of U.S. government and agency-backed securities — in the current quarter to reduce wholesale borrowing.
With the collapse of crypto, Silvergate’s share price has tumbled 90 percent off its highs. But on Tuesday, the stock gained 10 percent to close at $14.24 on the New York Stock Exchange.