Bank’s Response Reveals Significant Risk Management and Due Diligence Failures
“Both Congress and the public need and deserve the information necessary to understand Silvergate’s role in FTX’s fraudulent collapse”
Text of Letter (PDF) | Response from Silvergate (PDF)
Washington, D.C. — United States Senators Elizabeth Warren (D-Mass.), Roger Marshall, M.D. (R-Kan.), and John Kennedy (R-La.) released new information on Silvergate Bank’s failures related to crypto firm FTX in a follow-up letter to Silvergate CEO Alan Lane. The Senators released Silvergate’s response to their December letter that requested information about whether the bank was aware that FTX customer funds were being improperly wired to Alameda’s Silvergate account, and if the bank is prepared to withstand the stress of the current crypto market.
On December 6, 2022, the lawmakers wrote to Silvergate seeking answers about the bank’s role in the loss of billions of dollars in FTX customer funds, the misuse of which was revealed after the crypto exchange’s collapse. The bank’s response was largely evasive and refused to provide much of the requested information on the grounds that it was “confidential supervisory information.”
“We wrote to you seeking information on what appeared to be an egregious failure of your bank’s responsibilities to monitor and report suspicious financial activity,” wrote the lawmakers. “Your response confirms the extent of this failure – but then neglects to provide key information needed by Congress to understand why and how these failures occurred.”
While Silvergate’s response was unsatisfactory, it did reveal several new pieces of information, including that (1) “Silvergate had risk management and due diligence processes in place – but that these processes failed they did, in fact, fail miserably;” (2) that Silvergate was subject to (at least) annual exams conducted by the Federal Reserve and annual audits conducted by independent auditors, neither of which identified the problems with FTX and Alameda; (3) that Silvergate has an ongoing internal investigation of FTX and Alameda; and that (4) Silvergate has not yet held its top risk manager, Mr. Tyler Pearson, responsible for the extraordinary gaps in the bank’s due diligence process.
“It is crucial that you provide Congress with the information needed to assess the extent to which Silvergate is responsible for the improper transfer of FTX customer funds to Alameda, and to determine the nature of the compliance failures by your bank and your auditors that could have allowed for such abuses,” concluded the lawmakers.
In the weeks since Silvergate’s response, the bank has experienced heavy financial losses and in early January, it was revealed that the bank had secured a $4.3 billion loan from the Federal Home Loan Bank (FHLB) of San Francisco.
“By using the FHLB as its functional ‘lender of last resort,’ Silvergate has further introduced crypto market risk into the traditional banking system,” wrote the lawmakers. “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 Federal Deposit Insurance Company’s (FDIC) deposit insurance fund.”
The lawmakers are urging Silvergate to respond in full to initial questions about the bank’s involvement in the transfer of FTX customer of funds to Alameda, and, prompted by the new information in Silvergate’s response, are asking for new information about the bank’s risk management policies, examinations, and audits, and its use of the FHLB loan, no later than February 13, 2023.
Senator Warren has been an outspoken advocate for regulation and oversight of crypto to protect the environment, consumers, the energy grid, and the safety and stability of the financial system. Since the collapse of FTX, she has worked to hold all responsible parties responsible for possible crimes:
- On December 14, 2022, Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) introduced the Digital Asset Anti-Money Laundering Act of 2022, bipartisan legislation that would mitigate the risks that cryptocurrency and other digital assets pose to the United States’s national security by closing loopholes in the existing anti-money laundering and countering of the financing of terrorism (AML/CFT) framework and bring the digital asset ecosystem into greater compliance with the rules that govern the rest of the financial system.
- On December 6, 2022, Senators Elizabeth Warren (D-Mass.), Marshall, and John Kennedy (R-La.) wrote to Silvergate, the bank that reportedly facilitated the transfer of FTX customer funds to Alameda Research, seeking answers about the bank’s role in the loss of billions of dollars in customer funds.
- On November 30, 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren called on regulators to keep crypto out of the banking system following FTX’s collapse.
- On November 23, 2022, Senators Warren and Sheldon Whitehouse (D-R.I.) sent a letter to the Department of Justice requesting personal accountability for former FTX CEO Sam-Bankman Fried and any complicit FTX executives for wrongdoing following the exchange’s collapse.
- On November 22, 2022, Senator Warren published an op-ed in the Wall Street Journal urging federal regulators to use their expansive authorities to crack down on crypto fraud and hold the industry to the same basic standards as other financial activities.
- On November 17, 2022, Senator Warren, along with Senator Dick Durbin (D-Ill.), sent a letter to Sam Bankman-Fried, founder and former CEO of FTX Trading Ltd. (FTX), and John Jay Ray III, the newly appointed CEO of FTX, seeking information on the reported misuse of billions of dollars of customer funds and other disturbing allegations that continue to emerge about the company’s fraudulent and illicit practices.
- On October 25, 2022, Senators Warren and Whitehouse and Representatives Alexandria Ocasio-Cortez (D-N.Y.), Jesús “Chuy” García (D-Ill.), and Rashida Tlaib (D-Mich.) sent a letter to the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, the U.S. Department of Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, seeking information about the steps each regulator is taking to stop the revolving door between financial regulatory agencies and the cryptocurrency industry.
- In September 2022, Senator Warren sent a letter to Treasury Secretary Janet Yellen calling on the Treasury Department and the Financial Stability Oversight Council to build a strong regulatory framework for the crypto market.
- In July 2022, Senator Warren and her colleagues released the findings from an investigation into seven large cryptomining companies – showing extraordinarily high energy use and climate impacts from cryptomining – and called on the EPA and DOE to take action.
- In May 2022, Senators Warren and Tina Smith (D-Minn.), sent a letter to Fidelity, asking the company to explain its decision to allow Bitcoin investments for 401(k) plans, despite the Department of Labor’s warnings about 401(k) crypto investments.
- In March 2022, Senator Warren, Senate Armed Services Committee Chair Jack Reed (D-R.I.), Senate Intelligence Committee Chair Mark Warner (D-Va.), and Senate Defense Appropriations Subcommittee Chair Jon Tester (D-Mt.) introduced the Digital Asset Sanctions Compliance Enhancement Act to ensure that Vladimir Putin and Russian elites don’t use digital assets to undermine the international community’s economic sanctions against Russia following its invasion of Ukraine.
- In March 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren highlighted the various cryptocurrency tools that could make it easier for sanctioned individuals to hide their wealth and lessen the impact of Russian sanctions.
- In March 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren warned that cryptocurrency may allow Russia to dodge sanctions and urged stronger regulation of the crypto market to ensure that countries, drug traffickers, cyber criminals, and tax cheats can’t evade economic pain.
- In March 2022, Senators Warren, Warner, Reed, and Sherrod Brown (D-Ohio), Chair of the Senate Banking, Housing, and Urban Affairs Committee, sent a letter to Treasury Secretary Janet Yellen, asking about the Treasury Department’s plans to enforce sanctions-compliance guidance for the cryptocurrency industry to ensure that economic sanctions remain an effective tool for achieving foreign policy goals.
- In December 2021, during a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren raised concerns over the growing risks presented by stablecoins.
- In September 2021, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren called on regulators to step up to address crypto’s regulatory gaps and ensure an inclusive financial system.
- In July 2021, Senator Warren sent a letter to SEC Chair Gary Gensler requesting information about the agency’s authority to regulate cryptocurrency exchanges and protect consumers from risks posed by the highly volatile cryptocurrency market.
- In June 2021, chairing a hearing of the Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Economic Policy, Senator Warren delivered remarks on the opportunities and risks that digital currencies present.
- In a June 2021 interview, Senator Warren called the market for crypto the “wild west,” and said digital currency is “not a good way to buy and sell things and not a good investment and an environmental disaster.”
Press release from the office of Senator Elizabeth Warren (D, MA) on Tuesday, January 31, 2023