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Silvergate would be the bank behind FTX.

 

Crypto silvergate

«Life as a crypto firm can be divided up into before Silvergate and after Silver-gate,» Sam Bankman-Fried wrote in a quote featured on the website of the San Diego bank he used to transfer customer funds to his digital asset exchange FTX. Silvergate was an unlikely candidate to become the bank behind the $40bn crypto exchange that collapsed last month. By 2019 it was rapidly becoming the largest cryptocurrency bank in the US, with 1,600 of the world’s top crypto miners, exchanges and custodians using it to deposit and transfer billions of dollars each month. Barely 10 months after listing on the New York stock exchange at $12 a share, Silvergate’s shares climbed to more than $200.

«This was a tiny real estate lender that went all-in on crypto,» said one former employee. Silvergate «appears to be at the centre» of how those funds were moved around Bankman-Fried’s crypto empire, according to a letter from US senators to the bank’s chief executive, Alan Lane. It said the failure to detect such a «scheme» could mean Silvergate breached anti-money laundering laws. Lane tried to address market concerns about its links to FTX in a public letter last week that accused short sellers of spreading «misinformation».

Lane, a 60-year-old devout Catholic and grandfather to more than 20 children who lives in Temecula, California, is the mastermind behind Silvergate’s remarkable shift in strategy. Hired by Silvergate’s founders, Dennis Frank and Derek Eisele, in 2008 when the bank was floundering, Lane planned to turn it into a full service commercial bank, according to people close to the business. Wary of an emerging asset class that had been linked to money laundering and illegal drugs, major institutions refused to bank crypto exchanges and started blocking transfers by customers to buy cryptocurrencies. Lane and Reynolds recognised the gap and seized the opportunity, according to the ex-employee.

In 2017 it launched the Silvergate Exchange Network, or SEN, a platform that allowed crypto investors to transfer US dollars from their bank accounts on to a crypto exchange instantly. In March this year Silvergate issued a $200mn loan to a company owned by crypto billionaire Michael Saylor, its biggest lending US dollars secured by bitcoin. «Alan saw this opportunity in crypto, which I still don’t fully understand, and he’s built it into something that is quite an operation,» said his former boss and Silvergate investor Frank Mercadante. Silvergate has had to employ twice as many compliance staff as comparable banks of its size, according to two people who worked there.

As lawmakers pick over Silvergate’s relationship with FTX, the bank will be forced to examine its exposure to an industry where the risk of fraud and bad actors appears higher than ever. Silvergate’s share price is down almost 85 per cent this year, although at $23 it is still almost double its IPO price. «The demise of FTX could also drive litigation and headline risk across the crypto ecosystem,» they added.
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