Senate Democrats are urging financial regulators to investigate ties between banks and cryptocurrency firms after FTX’s bankruptcy revealed investments by FTX and Alameda Research executives in small banks.
Sens. Elizabeth Warren, D-Mass., and Tina Smith, D-Minn., on Wednesday sent letters to the Federal Reserve Chairman, FDIC, and Comptroller of the Currency, requesting that the agencies provide the names of banks that serve cryptocurrency firms, the total volume of loans to such firms in dollars and information on whether regulated banks are involved in trading crypto assets or derivatives.
“Banks’ relationships with crypto firms raise questions about the safety and soundness of our banking system and point to potential loopholes that crypto firms may seek to exploit to gain further access to banks,” the senators wrote.
“While the banking system has so far remained relatively unscathed by the latest crypto cash, the collapse of FTX shows that crypto may be more integrated into the banking system than regulators realize,” the letters read.
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The letters, first reported by Politico, come as Warren and other lawmakers on Capitol Hill have called for investigations and tougher regulations on the crypto industry following the collapse of FTX, once the $32 billion second largest cryptocurrency exchange. Former FTX CEO Sam Bankman-Fried faces numerous allegations of impropriety and legal action for his role in the liquidity crisis that forced the company to file for bankruptcy.
Of interest to Warren and Smith are reports that the Bankman-Fried, Alameda, hedge fund bought an $11.5 million stake in a small Washington state bank called Farmington State Bank — now renamed Moonstone Bank — which was more than double the value of the bank at the time. The New York Times reported that the bank’s parent company, FBH, is affiliated with Bahamas-based Deltec Bank. FTX is also based in the Bahamas. Deltec’s main customer, Tether, is a $65 billion crypto company, the report said.
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A former president of the Independent Community Bankers of America who spoke to the Times was surprised that regulators approved Alameda’s investment.
“The fact that an offshore hedge fund, which was essentially a crypto firm, bought a stake in a tiny bank for multiples of its stated book value should have raised massive alarm signals from the FDIC, state regulators and the Federal Reserve,” he said Camden Fine, who now works as a consultant to the banking industry. “It’s just amazing that all of this got approved.”
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Senators also called on other banks facing scrutiny following FTX’s collapse, including Silvergate Capital Corp., Provident Bancorp Inc., Metropolitan Commercial Bank, Signature Bank and Customers Bancorp Inc.
Questions have been raised about Silvergate Bank’s role in transferring up to $10 billion in FTX funds to Alameda. Documents from the company’s bankruptcy proceedings indicate that FTX, some of its affiliates and hedge fund Alameda Research all had banking ties with Silvergate.
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A bipartisan trio of senators on the Senate Banking Committee sent a letter to Silvergate on Tuesday for information on its role in the FTX to Alameda transaction. The senator’s letter noted that Silvergate’s custody services, which extended to Alameda and FTX, “appear to be at the center of improper transfers of client funds.”
Sens. John Kennedy, R-La., Roger Marshall, R-Kan., and Elizabeth Warren, D-Mass., wrote: “Your bank’s involvement in the transfer of FTX client funds to Alameda demonstrates what a egregious error you made seems to be your bank’s responsibility to monitor and report suspicious financial activity by its customers. The public owes a full account of the financial activities that may have resulted in the loss of billions of dollars in customer assets and any role Silvergate may have played in those losses.”
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Silvergate says it conducted extensive due diligence on FTX and Alameda research both during the onboarding process and during ongoing monitoring in accordance with risk management policies and procedures. The company added in a statement released Monday that it is acting in compliance with the Bank Secrecy Act and the USA Patriot Act.
“It’s been a very difficult few weeks for the digital asset industry as we all come to terms with the apparent misuse of client assets and other misjudgments by FTX and Alameda Research,” Silvergate said.
But senators noted that Silvergate’s average deposits have fallen by more than $2 billion since September. In addition to FTX, another Silvergate customer has this went bankrupt amid the crypto contagion is BlockFi – which was brought down by its involvement in FTX, but apparently had better corporate controls than FTX after its bankruptcy filings.
Congress is set to hold hearings on the FTX collapse next week as lawmakers press for answers and possible legislative action to crack down on crypto.
Eric Revell of FOX Business contributed to this report.