Three U.S. senators are pressing crypto-heavy Silvergate Bank about its knowledge of crypto exchange FTX’s alleged misuse of customer funds.
Sens. Elizabeth Warren, D-MA, Roger Marshall, R-KS, and John Kennedy, R-LA, penned a letter Monday to Alan Lane, CEO of parent company Silvergate Capital Corp., saying they were “disappointed by [his] evasive and incomplete response” to a Dec. 5 letter inquiring about the bank’s relationship to FTX.
FTX filed for bankruptcy in November and its founder, Sam Bankman-Fried, and other executives have since been charged with fraud.
Bankman-Fried is accused of taking funds from FTX users without their knowledge and putting them into its sister company Alameda Research, a crypto hedge fund. Some of those funds were potentially routed through Alameda’s account with Silvergate.
The senators call Lane out on information within his Dec. 19 response, including that “in accordance with [its] risk management policies and procedures, Silvergate conducted significant due diligence on FTX and its related entities, including Alameda Research, both during the onboarding process and through ongoing monitoring.”
Silvergate also said in the response that its chief risk officer, Tyler Pearson, “remains an important part of the risk management team at Silvergate,” that the Federal Reserve conducts annual exams of Silvergate, and that the bank has begun an ongoing review “of the transactions involving accounts associated with FTX and/or Alameda.”
“These are important insights,” the senators wrote Monday. “They reveal that Silvergate had risk management and due diligence processes in place — but that they did, in fact, fail miserably. 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. And they revealed that Silvergate has not held its top risk manager, Mr. Pearson, responsible for these failures.”
The letter failed to provide the information needed by Congress to understand “how and why these failures occurred,” the senators wrote.
Reports surfaced last month, after Lane’s initial response to the senators, that Silvergate turned to the Federal Home Loan Bank of San Francisco for a cash injection following a bank run kicked off by FTX’s collapse. Of the $4.6 billion cash that Silvergate has on hand, $4.3 billion came from FHLB, according to American Banker.
In taking this cash injection from FHLB, Silvergate introduced crypto market risk further into the traditional banking system, according to the senators.
“If Silvergate were to fail — as have banks facing a fraction of the withdrawal rates Silvergate has faced — FHLB could ‘assert statutory lien priority on other assets — essentially putting the Home Loan bank ahead of all other creditors,’ including the [FDIC’s] deposit insurance fund,” the senators wrote. “Financial experts have noted that such a scenario could leave the FDIC — and therefore the American taxpayer — holding the bag.”
Silvergate last month cut its staff by 40%. Federal prosecutors seized about $100 million from Silvergate accounts linked to FTX and Bankman-Fried on Jan. 4.
However, a Securities and Exchange Commission filing by BlackRock on Tuesday showed that the world’s largest asset manager increased its stake in Silvergate.
"Silvergate operates a robust compliance and risk management program,” a spokesperson for the bank told CoinDesk. “In accordance with its risk management policies and procedures, Silvergate conducted significant due diligence on FTX and its related entities, including Alameda Research."
The senators want Lane to respond by Feb. 13.