US regulators launch official investigation into Silvergate FTX trades

US regulators launch official investigation into Silvergate FTX trades

Silvergate, one of many creditors that suffered huge losses due to FTX's bankruptcy, was previously forced to lay off 40% of its employees.

This business downturn was compounded by significant loans worth billions of dollars taken out to cover a possible bank run that the organization feared following the collapse of FTX.

Silvergate in the hot seat

Although multi-billion dollar loans may seem par for the course for typical banks, the flow taken by Silvergate reportedly amounts to the majority of its current cash reserves.

Her bank “now holds about $4.6 billion in cash,” the vast majority — $4.3 billion — of which it secured as an advance from the FHLB. By using the FHLB as a functional lender of last resort, Silvergate has further introduced crypto market risk into the traditional banking system.”

The bank's balance sheet is also looking worse after it suffered a $1 billion loss last quarter - and a 20 percent drop in its share price during extended trading hours on Thursday.

No official accusations yet

Although the current investigation into FTX Group's dealings with Silvergate is being conducted in an official capacity this time, no allegations have yet been made, according to Bloomberg.

Instead, the current investigation, coordinated by the US Department of Justice, aims to uncover how much Silvergate management actually knew about FTX's operations. Especially if they suspected financial misconduct was being carried out through bank accounts held by Silvergate, which would have required the bank to report the exchange to authorities.

If Silvergate's evasive answers turn out to be just typical banking secrecy, the investigation will likely be complete, albeit with more information about FTX's banking strategies.

For now, Silvergate has confirmed that it has conducted due diligence on every FTX Group company it has been affiliated with, starting with the onboarding of Alameda Research in 2018. Aside from internal audits, it is also worth noting that Silvergate – which reportedly had a reputation for being highly compliant with authorities – was audited annually by both the Federal Reserve and independent auditors.

However, these audits may not have been rigorous enough. Aside from the DOJ investigation, Silvergate also faces a potential class-action lawsuit from other investors who reportedly accused the bank of concealing its financial controls and audits.

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