Justice Department Investigating Silvergate Bank’s Role in FTX Saga 

Justice Department Investigating Silvergate Bank's Role in FTX Saga

As it has unravelled over the last few months, it is clear that the FTX saga is as complicated as it is interesting. Far from your typical case of a business failing, this saga has seen accusations of embezzlement, affairs, misconduct on several levels, and much more.

Now adding to the complexity of the case is the recent attention being shown to Silvergate, a crypto-friendly bank, by the US Department of Justice. The department’s ongoing investigation is trying to determine the role that the bank played in the operations and subsequent downfall of the infamous crypto exchange. 

Silvergate Under the Spotlight 

It is worth noting that Silvergate as an institution has a long and storied history with the crypto industry. It famously bought up the assets associated with Facebook’s failed stablecoin venture in 2022 for $200 million dollars. In the last few years, it has had other crypto-related dealings, including allegedly hosting several accounts for FTX and Alameda Research, which is why it is being investigated. 

And this is not the only blowback it has experienced as a result of its dealings with FTX as when the exchange first went under, Silvergate customers withdrew their assets from the bank in mass. The panic among investors and subsequent withdrawal crisis was so bad that it was noted in the bank’s fourth-quarter statements. 

“The digital asset industry has undergone a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies. These dynamics have sparked a crisis of confidence across the ecosystem and led many industry participants to shift to a “risk off” position across digital asset trading platforms. In turn, Silvergate’s total deposits from digital asset customers declined to $3.8 billion at the end of the fourth quarter,” the statement said. 

As one would imagine, this took a toll on Silvergate’s financial situation and in January 2023, the company had to let go of 40% of its staff. But its woes are not over as several regulators have taken aim at the bank, accusing it of exposing the traditional banking sector to the volatility of the crypto market. 

“It’s the bank regulators’ job to insulate the banking system and taxpayers from the risk of crypto fraud. They have the tools, and they need to use them,” Senator Elizabeth Warren says. 

The Implications of this Development

While it is too early to say whether or not Silvergate will have any legal liabilities in the FTX case, it is clear that its involvement in the company has had a wider ripple effect. For years, the crypto and mainstream financial worlds were separate but the efforts of banks like Silvergate seemed to bring them closer together. 

On one hand, this means that the industry can access more opportunities. It also means that the mainstream financial sector is seeing firsthand how volatile and unpredictable the crypto space can be. And as the ongoing issues with Silvergate show, the response to this is not necessarily positive.  

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