San Diego's Silvergate Capital made its name in recent years as one of a few traditional banks providing deposit, fund transfer, security and other services for the cryptocurrency trading market.
But two-high profile crypto-exchange bankruptcies — one of which is alleged to involve fraud — have sent the small financial institution's shares reeling, and drawn the scrutiny of lawmakers.
Silvergate's stock price has plunged 88 percent from a 12-month peak of $162.87 last December, trading at $18.80 midday Tuesday on the New York Stock Exchange.
Elizabeth Warren, D-Massachusetts, and two other Senators sent a letter to Silvergate Chief Executive Alan Lane last week raising questions about the California-chartered bank's safeguards around accounts of crypto exchange FTX and its sister trading firm Alamada Research.
"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," said the letter, which was also signed by Republicans John Kennedy of Louisiana and Roger Marshall of Kansas. Warren and Kennedy are members of the Senate banking committee.
"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," the Senators said.
The letter calls for Silvergate to provide answers to a series of specific questions by Dec. 19.
In a statement, Silvergate responded that it plans to comply with the Senators' demands within its legal limits.
"As a regulated bank, we remain committed to complying with our Bank Secrecy Act/ Anti-Money-Laundering obligations and look forward to answering Senator Warren's questions as openly and transparently as possible."
Lane also responded separately in a Dec. 5 letter to the bank's shareholders. "It has been a very difficult few weeks for the digital asset industry, as we have all come to terms with the apparent misuse of customer assets and other lapses of judgment by FTX and Alameda Research."
But Lane contends Silvergate did "significant due diligence" and ongoing monitoring of FTX and Alameda Research accounts at the bank, handling wire transfers per the senders' instructions and industry practice.
He added that short sellers are spreading misinformation about the bank's role in spotting the FTX/Alameda problems. Interest in the stock by short sellers, who bet that the price will go down, was up 97 percent in November compared with October.
FTX collapsed last month and filed for Chapter 11 bankruptcy. Its financial health came into question after revelations alleging poor financial controls that led to customer funds being funneled into risky investments made by Alameda Research without their knowledge.
Potential losses for investors are unclear but could be in the billions. FTX's founder, Sam Bankman-Fried, was arrested Monday in the Bahamas on U.S. charges that are expected to be made public Tuesday. Bankman-Fried also allegedly controlled Alameda Research. The U.S. Securities and Exchange Commission also filed civil fraud charges against Bankman-Fried on Tuesday.
David Chiaverini, an analyst with Wedbush Securities, says Silvergate could face a fine from regulators as well as a class action lawsuit from FTX customers or investors who lost money. But he thinks these possible scenarios could be costly but should be manageable for the bank.
Already, at least two lawsuits have been filed by Silvergate shareholders alleging the bank made misleading statements to its investors. Both seek class-action status.
Silvergate's main business is facilitating payments between crypto hedge funds and crypto exchanges. But in a research report issued last month, Chiaverini wrote that he doesn't think Silvergate is at fault for FTX's handling of funds.
"Silvergate did what banks do — it facilitated payments between two willing parties in which neither transacting party was on (a U.S.) sanctions list or other restriction list, nor were the payments abnormal for the businesses in which the parties operate," Chiaverini wrote.
"Alameda Research is a large crypto hedge fund and FTX is a large crypto exchange," he said, "so it's natural for Silvergate to provide payment services to each."
Volatility in crypto markets started last summer as investors sought to reduce risk amid economic headwinds, and prices of digital currencies fell sharply.
Bitcoin, the best-known digital currency, has seen its value plunge 64% from its 2022 high. Digital currency lender BlockFi went bankrupt on the heels of FTX's implosion.
Silvergate doesn't own or trade cryptocurrency itself. It provides many traditional banking services — including deposit services, fund transfers, 24/7 U.S. dollar transaction facilitation, customer account controls and security — needed to enable digital currency trading.
The result has been a growing pool of no-interest deposits that the bank can then use to fund loans or invest in other interest-bearing instruments — largely from institutional traders. At their peak, Silvergate's deposits reached about $12 billion.
With the bankruptcies and other turmoil, about $1.9 billion of Silvergate's deposits had left the bank as of the end of the September quarter.
Silvergate says it has ample liquidity to deal with the falloff. Its total deposits stood at $9.8 billion as of mid-November. Daily use of its U.S. dollar exchange services for crypto traders hasn't slowed down, according to the bank.
"We intentionally carry cash and securities in excess of our digital asset related deposit liabilities," said Lane in a statement. "We purpose-built this business to support our customers not only during periods of growth but also in periods of volatility — that is, our business is designed to accommodate deposit inflows and outflows under a range of market conditions."
