Bloomberg reports that US prosecutors in the Justice Department’s fraud division are investigating Silvergate Capital Corp.’s links with collapsed crypto heavyweights FTX and Alameda Research. The criminal probe is scrutinizing the hosting of Sam Bankman-Fried’s business accounts by Silvergate.
In extended trading on Thursday, Silvergate shares dropped more than 20%, erasing a 29% increase during standard market hours in New York. Silvergate was among the lenders seriously affected by FTX’s abrupt collapse in November. Last quarter, the bank recorded a $1 billion shortfall and laid off 40% of its workforce. It also admitted to taking out billions of dollars of bank loans to prevent a run on deposits following the collapse of FTX.
The Biggest Questions Surrounding the FTX Debacle
The investigation, which began in recent weeks, addresses one of the most pressing unanswered questions regarding the FTX incident. What did banks and intermediaries working with Bankman-Fried’s businesses know about the alleged multi-year scheme to deceive investors and customers, as described by US officials?
According to Silvergate, Alameda created an account with the bank in 2018 before the launch of FTX. The bank has stated that it is analyzing transactions involving accounts affiliated with FTX and Alameda and that it completed due diligence on the entities during registration and subsequent monitoring.
Silvergate positioned itself as the go-to bank for crypto firms and was an early provider of industry-specific services. It developed mechanisms to enable real-time fiat currency exchanges between crypto clients with bank deposits. Among some previous prosecutors who are now cryptocurrency enthusiasts, the business had retained a reputation for strictly adhering to U.S. law.
Bipartisan senators wrote to Silvergate on Monday to inquire about its understanding of FTX’s alleged misappropriation of customer funds. A spokesman for Silvergate stated on Tuesday that the firm has a strong compliance and risk management policy and conducted extensive due diligence on FTX and Alameda Research.
Bankman-Fried has stated publicly that FTX funds were moved through Alameda bank accounts. The setup was a mechanism for FTX to circumvent banks’ reluctance to host crypto-linked assets due to possible regulatory difficulties. In the meantime, the lender is also defending itself against a prospective class action for securities fraud by investors who believe the bank has been secretive about its accounting policies, citing the FTX collapse.
