US Regulators Launch Official Probe Into Silvergate-FTX Dealings

The probe follows an exchange of letters between Silvergate and Sen. Elizabeth Warren and her associates, who accused the bank of responding evasively.

Silvergate, one of many creditors to take huge losses due to FTX going under, was previously forced to lay off 40% of its staff.

This hit to its business was compounded by billions of dollars in substantial loans taken out to cover a potential bank run the organization feared might occur after FTX’s collapse.

Silvergate in The Hot Seat
Although multibillion-dollar loans may seem par for the course of typical banks, the current taken out by Silvergate allegedly amounts to most of its current cash reserves.

“Your bank “now holds roughly $4.6 billion in cash,” the vast majority – $4.3 billion – of which it secured as an advance from the FHLB. By using the FHLB as its functional “lender of last resort,” Silvergate has further introduced crypto market risk into the traditional banking system.”

The bank’s balance sheet is also looking worse for wear, having faced a loss of $1 billion over the past quarter – and a 20% drop in share price in extended trading hours on Thursday.

No Official Accusations As of Yet
Although the current probe into the FTX Group’s dealings with Silvergate is, this time, made in an official capacity, no accusations have been levelled yet, according to Bloomberg.

Instead, the current investigation, which is being coordinated by the US DOJ, aims to uncover how much Silvergate’s management actually knew about FTX’s business dealings. Especially if they suspected financial misconduct was being carried out via Silvergate-held bank accounts, which would have obligated the bank to report the exchange to the authorities.

If it turns out that Silvergate’s evasive answers are merely a matter of typical bank secrecy, the investigation will likely conclude, albeit with more information on FTX’s banking strategies.

For now, Silvergate has confirmed that it performed due diligence for every entity in the FTX Group that it had ties to, starting with Alameda Research’s onboarding in 2018. It’s also worth mentioning that, aside from internal audits, Silvergate – which reportedly had a reputation for being very compliant with authorities – was audited annually by both the Federal Reserve and independent auditors.

However, these audits may not have been stringent enough. Aside from the DOJ investigation, Silvergate is also facing a potential class-action lawsuit from other investors, who reportedly accused the bank of obfuscating their financial controls and audits.