The ‘flat’ company changed its life by turning into a digital currency bank, now the center of investigation in the 40 billion USD bankruptcy case

“Life as a crypto company can be divided into 2 phases: Before Silvergate and After Silvergate,” said Sam Bankman-Fried once quoted on the website of the San Diego-based bank. Silvergate was the same bank he used to transfer client funds to his digital asset exchange FTX.

“It’s hard to say to what extent Silvergate has revolutionized banking for blockchain companies“.

Silvergate was not a strong candidate for the banker position behind the $40 billion cryptocurrency exchange that went bankrupt last month.

For most of its 30-year history, Silvergate was a small crowdfunding company focused on financing small real estate transactions, with three branches in southern California and less than $1 billion in assets. .

But by 2019, it was quickly becoming the largest crypto bank in the US. Around 1,600 of the world’s leading cryptocurrency miners, exchanges and custodians use Silvergate to send and transfer billions of dollars every month.

Deposits have grown from about $2 billion in 2020 to over $10 billion in 2021. By this year, their total assets have skyrocketed to $16 billion. Just 10 months after listing on the New York Stock Exchange at the end of 2019, at $12 per share, Silvergate’s share price has risen to more than $200 per share.

A former employee said: “This is a small real estate loan company that has invested entirely in cryptocurrencies. Strange”.

But the roller coaster ride came to an abrupt halt last week with Silvergate being targeted by US senators investigating the failure of FTX, which has been accused of mishandling deposits from customers. The company is currently facing a loss of up to 10 billion USD.

According to a letter from US senators to Silvergate CEO Alan Lane, the bank “seems to be the center” on how those funds are moved around Bankman-Fried’s crypto empire. The letter said failure to uncover such a “scheme” could mean Silvergate was in violation of anti-money laundering laws.

Lane attempted to address market concerns about its links to FTX in a public letter last week accusing short sellers of spreading “speculation” and “misinformation.” . He said the bank has conducted “Substantial review of FTX and related entities“.

Silvergate has quietly removed Bankman-Fried’s “glory tribute” from its website, along with all references to former customers. FTX’s collapse wiped out two of the bank’s top customers: About 10% of Silvergate’s total assets belonged to FTX, and its customers also included crypto lenders like BlockFi, a disaster. another major cause of the crash. FTX and “related entities” held about 20 different accounts at Silvergate, according to bankruptcy filings.

The bank has now been given until December 19 to respond to the letter and provide a “full account of its relationship with FTX”.

Lane, a devout 60-year-old and grandfather of more than 20 children living in TemeculaCalifornia, is the mastermind behind Silvergate’s remarkable strategic shift over the past few years.

Hired by Silvergate founders Dennis Frank and Derek Eisele in 2008 when the bank was struggling, Lane planned to turn it into a full-service commercial bank. Lane has also previously held positions at a chain of small local banks.

But in 2013, Lane started learning about cryptocurrencies. Bitcoin, then a four-year-old new technology, hit a record that year, rallying nearly 7,000% to $1,000 a coin for the first time. Cryptocurrencies are also slowly starting to gain mainstream awareness.

Ben Reynolds, president of Silvergate, who was hired by Lane in 2016 to strengthen its crypto strategy, said:We needed deposits and Alan was starting to see that companies like Coinbase weren’t accepted by traditional banks. So the idea is: If we can deposit via Coinbase, we can find the deposit. Alan went to the Federal Reserve and said we wanted to provide basic banking services to Bitcoin companies and they agreed.“.

Wary of an emerging asset class linked to money laundering and illegal activities, major financial institutions have refused to bank digital currencies and have begun blocking customers’ transfers for purchases. digital money. Traditional banks are also not set up for crypto traders.

According to former employees, Lane and Reynolds recognized vulnerabilities and inefficiencies in the rapidly growing market and seized the opportunity. He told: “Silvergate’s founders were all in real estate, but they loved the shift in that direction because it was as simple as making money.“.

Over the next six years, Lane and Reynolds sold off Silvergate’s business banking group and downsized the real estate group. Their crypto customer base has grown from around 20 companies in 2016, including Xapo, Paxos, and Bitfury, to more than 1,000. The bank’s management is also beginning to explore riskier ways to strengthen its balance sheet, including launching a stablecoin and structuring loans for the cryptocurrency.

In 2017, they launched the Silvergate Exchange Network (SEN), a platform that allows crypto investors to transfer USD from their bank accounts to a cryptocurrency exchange instantly and 24/7. , as long as both the exchange and the investor share the same bank as Silvergate.

Then, in March of this year, Silvergate granted a $200 million loan to a company owned by American crypto billionaire Michael Saylor, the company’s biggest-ever move in USD lending. backed by Bitcoin.

“Alan saw this opportunity in crypto, which I still don’t fully understand, and he built it into something that works pretty well.,” said former owner and investor of Silvergate, Frank Mercadante.

But, this activity is fraught with risk. According to two former employees, Silvergate had to employ twice as many compliance staff as comparable banks of the same size. It usually takes six months for a new crypto exchange to open a bank account. “The main risks are knowing your customer and anti-money laundering and those risks have been taken seriously since 2014” – when Silvergate won its first crypto customer. In June 2021, Silvergate terminated its relationship with Binance, the world’s largest cryptocurrency exchange, for undisclosed reasons.

As lawmakers decide Silvergate’s relationship with FTX, the bank will be forced to consider its potential exposure to an unregulated industry where the risk of fraud and bad actors is higher than ever. time out.

A person close to Silvergate said: “The bank has no real responsibility to prevent transactions between entities that appear to be legitimate. This is the root cause of not enough regulation for crypto companies“.

Silvergate’s stock price has halved before the FTX crash and is down nearly 85% this year, albeit at $23 — still almost double its IPO price. According to analysts at Morgan Stanley: “The collapse of FTX could also lead to lawsuits and top risks across the crypto ecosystem“.

Source: Financial Times