Fed inspector blames crypto focus, nepotism for Silvergate Bank collapse

October 3, 2023 Coin Telegraph

An investigation into Silvergate Bank found that its collapse was brought about by a dependency on crypto deposits and “ineffective” senior management.

Crypto-friendly Silvergate Bank ultimately collapsed this year due to over-dependence on risky crypto deposits and nepotism that led to ineffective management, according to inspectors at the Federal Reserve.

In a Sept. 27 executive summary of its review into the collapse of Silvergate Bank, the Federal Reserve Board’s Office of Inspector General pointed the finger at Silvergate’s change in strategy to focus on “customers engaged in crypto activities” in 2013.

“Silvergate’s concentration in crypto industry deposit customers, rapid growth, and multilayered funding risks led to the bank’s voluntary liquidation.”

Evolving from a little-known institution in the early 2010s, Silvergate expanded rapidly to become the premier bank for crypto clients, growing from $1 billion in deposits in 2017, to $16 billion by 2021.

During this period of rapid growth, the Fed said the bank grew to become essentially a single-industry lender, with the vast majority of its customer deposits being uninsured and non-interest bearing.

*The factors that led to Silvergate’s voluntary liquidation. Source: Office of Inspector General*

If the institution had been properly following existing banking regulations, it should have filed a new application with the Fed, but government supervisors failed to pressure it to establish new risk protection measures.

While some government supervisors had voiced their concerns with the bank’s activities, the Fed said these should have been escalated through “stronger, earlier, and more decisive supervisory action.”

Silvergate’s over-reliance on crypto became suddenly evident following the collapse of the now-defunct crypto exchange FTX in November 2022, with tens of billions of dollars in capital fleeing the sector in the following months.

Silvergate’s purported wrong-doings weren’t just limited to crypto. Investigators also claimed that nepotism plagued the banks’ senior management, leading to an incompetent and ineffective corporate structure that failed to address the many risks present at the time.

"Further, nepotism, evidenced in the several familial relationships among members of the bank’s senior leadership team, undermined the effectiveness of the bank’s risk management function."

“Silvergate’s board of directors and senior management were ineffective, and the bank’s corporate governance and risk management capabilities did not keep pace with the bank’s rapid growth, increasing complexity and evolving risk profile,” concluded the report.

The bank voluntarily wound down in March 2023, meaning that the bank didn’t technically fail. This meant that the government did not have to step in and force it to pay back depositors.

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Tether adds Bahamas-based private bank Britannia as partner: Report

August 30, 2023 Coin Telegraph

Banking Parnters

Tether’s reported new partnership with Britannia Bank makes it the third Bahamas-based bank to join forces with the stablecoin issuer.

Tether, the stablecoin issuer behind USDT, has reportedly added Britannia Bank & Trust, a private bank based in The Bahamas to process dollar transfers on its platform.

It is understood Tether has instructed clients to send money to Britannia’s bank account over the last few months, according to an Aug. 29 report by Bloomberg, citing people familiar with the matter.

However, it isn’t clear when Tether’s banking relationship with Britannia Bank started, but its other reported banking partners include Deltec Bank and Capital Union Bank.

In recent months, United States-based cryptocurrency firms have had to increasingly look offshore for banking partners amid increased scrutiny by U.S. regulators following the shock collapse of FTX in November.

Tether’s unwillingness to publicly disclose the full extent of its balance sheet and banking relationships has also fueled industry FUD (an acronym for fear, uncertainty and doubt) in the past over how the stablecoin issuer stores its $86 billion in assets.

Tether’s USDT currently dominates the stablecoin market, with its $82.9 billion market cap representing 66.5% of the total market, according to CoinGecko.

USDT’s market cap rallied over 20% to $80 billion over the first four months of 2023 — amid the banking crisis involving Silvergate Bank, Signature Bank and Silicon Valley Bank — but has since steadied out around the $80-82 billion since then.

*USDT's change in market cap over the last 12 months. Source: CoinGecko*

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Warren’s alleged work with short-seller shows anti-crypto army heating up

June 3, 2023 Coin Telegraph

Coin Telegraph

Elizabeth Warren reportedly took advice from Wall Street short-seller Marc Cohodes, who cashed in on the collapse of Silvergate and Signature banks.

What do progressive Democrats, Republican national security hawks and Wall Street traders have in common? They are all apparently enlisting in United States Senator Elizabeth Warren’s “anti-crypto army.” The progressive senator’s reported alliance with Marc Cohodes, a Wall Street short-seller who profited from the recent carnage at crypto banks, is the latest example.

Crypto natives likely see the unusual pairing as further proof that entrenched interests are conspiring to kill Web3 in the United States. They aren’t entirely wrong, but America’s polarized factions are uniting against crypto for a reason. The industry has consistently failed to address valid concerns about financial crime and national security. That needs to change, or Warren’s anti-crypto army will continue attracting recruits.

Publicly traded crime scene?

In late 2022, Cohodes circulated a memo on Capitol Hill flagging “existential” regulatory risks at Silvergate, a crypto-friendly bank. The short-seller dubbed the bank a “publicly traded crime scene” and claimed, among other things, that Silvergate had “huge” Know Your Customer (KYC) and Anti-Money Laundering (AML) liabilities. These rules require U.S. financial institutions to carefully due-diligence their customers, and they are rigorously enforced.

Cohodes had reason to be concerned. Problems with KYC/AML compliance are rampant in crypto, and Silvergate appears to have been a striking example. According to New York magazine, Silvergate was “the go-to bank for more than a dozen crypto companies that ended up under investigation, shut down, fined, or in bankruptcy,” including FTX, the defunct crypto exchange. Cohodes claimed the bank went so far as to help FTX siphon user deposits into its sister fund, Alameda.

Silvergate shut down after FTX's flameout in March, but its collapse may be symptomatic of serious industry-wide problems. The crypto bank, Cahodes claimed, was “a worldwide money laundering story… with a crypto wrapper.”claimed, was “a worldwide money-laundering story […] with a crypto wrapper.”

Anti-crypto army

Cohodes’ Silvergate memo reportedly found a receptive audience in Warren, who has become one of crypto’s most caustic critics. Unlike her calls for a wealth tax of up to 6% or a “just and equitable cannabis industry,” Warren’s crypto critiques are resonating far beyond progressive circles. Her message is simple: Crypto, Warren says, enables bad actors — from drug traffickers to rogue states — and is a threat to national security.

Her anti-crypto crusade is gaining traction. In January, three U.S. financial regulators published a joint statement on crypto banking. It heavily echoed Warren’s proposals, effectively laying the groundwork for a regulatory crackdown. The senator is working with Republicans on a bill that would impose strict industrywide KYC requirements. She is even attracting cautious support from banking lobbyists.

The problem isn’t with Warren’s overarching concerns. Web3 should be accountable for filtering out bad actors. It’s that clumsy policy implementation risks damaging the nascent industry irreparably. For example, Warren’s proposed KYC/AML legislation appears to indiscriminately target almost every touchpoint in crypto, including validators. It could severely undermine network decentralization, arguably Web3’s most essential feature.

Crypto should embrace KYC/AML to undermine Warren

Silvergate may have collapsed, but KYC/AML liabilities still permeate Web3. It’s no accident. Anyone familiar with crypto’s cypherpunk origins knows that, for many users, anonymity is a feature, not a bug. Indeed, privacy and self-custody are Web3’s raison d’etre.

It’s a mistake to dismiss crypto as a tool for money laundering. Blockchain’s unique attributes have transformative applications in industries ranging from asset management to media. Unfortunately, they are also setting up the industry for a head-on collision with U.S. regulators.

Web3 isn’t out of options. Emerging technologies are creating new ways to address policy concerns without compromising crypto’s core values. For example, zero-knowledge identity proofs promise seamless on-chain KYC/AML checks that respect users’ privacy. Meanwhile, blockchain intelligence platforms, such as Chainalys have been a boon for financial crime enforcement agencies.

The industry should stop burning political capital on resisting KYC/AML requirements altogether. Instead, we need to start attacking these challenges ourselves — or Warren’s army will.

Alex O’Donnell is the founder and CEO of Umami Labs and worked as an early contributor to Umami DAO. Prior to Umami Labs, he worked for seven years as a financial journalist at Reuters, where he covered M&As and IPOs.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Stablecoins are a critical countermeasure to Operation Chokepoint

June 2, 2023 Coin Telegraph

Banking

Stablecoins could help crypto firms to remove themselves from the banking system — and prevent the U.S. government from cutting off their financial lifelines.

Boosting financial inclusion is one of crypto’s strongest value propositions. Yet, ironically, the banking crisis has effectively de-banked the crypto industry itself, at least in the United States.

How things panned out with Silvergate, Silicon Valley Bank and Signature — the three crypto-friendly U.S. banks — reeks of what Nic Carter called “Operation Chokepoint 2.0.” There’s good merit to this claim, though naysayers peddle conspiracy theory allegations with much harshness.

Signature, for one, did not face a bank run. The Federal Deposit Insurance Corporation still took the bank over in a jiffy. Anonymous sources even alleged the FDIC had asserted that any purchaser “must agree to give up all the crypto business,” though the agency walked back those claims.

I don't want to alarm, but since the turn of the year, a new Operation Choke Point type operation began targeting the crypto space in the US. it is a well-coordinated effort to marginalize the industry and cut of its connectivity to the banking system - and it's working
— nic carter (@nic__carter) February 7, 2023

Crypto not only has the resilience but also the tools to fight back — by leveraging stablecoins to minimize bank dependence. Besides solving an immediate crisis, it can also provide the ground to establish crypto as a self-sufficient and parallel financial system. That was Satoshi’s vision, after all.

U.S. regulators are shooting themselves in the foot

There’s a reason why most regulatory authorities — except in some progressive jurisdictions — have their guns blazing for crypto. Their power rests on the toxic relationship between governments, money printers, big corporations and oligopolies disguised as banking systems. The non-intermediated, permissionless and autonomous systems that crypto enables threatens this anti-individual nexus to its very core.

Our journey toward a more equitable, individual-centric world of crypto was never meant to be easy. The hyper-aggressive response from regulators is also pretty much in line with the expectations. But somehow the authorities, especially in the U.S., don’t seem to realize that their actions are self-destructive.

Technological progress has been crucial in taking the U.S. to its current position of dominance in global geopolitics. Emerging crypto-based technologies enabled the next giant leap in this direction. And if only the regulators could overcome their greed for short-term power and control, they would see how stifling innovation isn’t in their best interest.

For instance, the ongoing banking crisis, which is very much due to misguided policy action and selective enforcement, ultimately hurts financial stability in the United States. Moreover, if it’s indeed a coordinated effort to de-bank the crypto industry, the average U.S. taxpayer is bearing most of the brunt, despite staying within legal limits.

Some projects have found a scalable way to assist crypto firms in becoming regulated institutions — such as Archblock, which onboards U.S.-based community banks to expand on-chain “real-world asset” financing for regulated entities.

While this approach might eventually resolve some regulatory tussles, a sizeable section of the global crypto community is rooting for more radical solutions.

Crypto firms don’t need banks when they have stablecoins

Stablecoins have been under much scrutiny since Terra’s “algorithmic” coin, TerraUSD (renamed to TerraClassicUSD, crashed last year, setting off a chain of events that partly led to the FTX fiasco. The crash wiped out an ecosystem worth $40 billion, but it also served valuable lessons in due diligence, overexposure and risk management.

Something like Operation Chokepoint 2.0, actual or hypothetical, is possible because crypto companies and investors use banks as on-ramps or off-ramps. There are practical reasons for this choice: One can’t buy crypto with cash, for example, and must pay with U.S. dollars from their bank account. Even while using an exchange, they need bank transfers to deposit fiat.

Involving banks so much isn’t necessary, though. Stablecoins can offer the fiat tokenization services for which crypto companies depend on banks with much risk and despair. The process isn’t decentralized, but neither is banking for that matter. It’s not about decentralization here since the goal is to connect centralized and decentralized finance while minimizing counterparty risks.

Former BitMEX CEO Arthur Hayes published a richly informative blog on the subject in March in which he presented a detailed case for choosing stablecoins over banks. Most importantly, he proposed an innovative stablecoin model, which he called the Satoshi Nakamoto Dollar or NakaDollar (NUSD). The idea is to leverage Bitcoin (BTC) and inverse perpetual swaps such that NUSD doesn’t involve banks in the issuance or redemption process.

Proposals like NUSD are signs of our collective willingness to fight back in the face of regulatory uncertainty and aggressive onslaughts. As crypto evolves, there will be lesser attack surfaces for regulators, and we’ll have more robust alternatives to legacy systems.

Innovation isn’t merely a business model — it’s our biggest strength. And it is through innovation that crypto will overcome all hurdles. The show must go on since future generations deserve a better world.

Sarah Austin is the co-founder of QGlobe Games, a Steam-modeled gaming platform for crypto. She was the founding CMO of Kava Labs, the founding CEO of Pop17.com and the original community builder for Twitch. She graduated from the Dominican University of California before obtaining a data science certification from John Hopkins University.

Silvergate begins NYSE delisting process as it readies to cut 230 staff

May 12, 2023 Coin Telegraph

Banking

The parent company of the defunct Silvergate Bank disclosed significant staff cuts and the delisting of its securities in an SEC filing.

The parent company of the collapsed Silvergate Bank will be delisted from the New York Stock Exchange, and 230 of its staff will be let go, Silvergate Capital has disclosed.

In a May 11 filing to the United States Securities and Exchange Commission, Silvergate Capital said 230 staff will be “separated” starting May 12. The NYSE also suspended trading in its stock, with delisting to commence “shortly.”

*A year-to-date chart of Silvergate Capital’s share price shows a nearly 93% price drop since the start of 2023. Source: Google Finance*

After the staff cut, “approximately 80 officers and employees” will be left behind to continue Silvergate Bank’s liquidation process.

More cuts are on the horizon. At least three more headcount cuts are slated, for June 30, Aug. 30 and Nov. 30 “or later,” the filing states.

Silvergate estimated staff drawdown costs would land around $13.6 million with expenses on severance, retention and bonus pays along with job placement programs.

No more financial updates

In a separate May 11 SEC filing, Silvergate said it’s unable to file legally required financial reports for the 2022 fiscal year and the first quarter of 2023 and “does not expect to be able” to file any similar reports in the future.

The firm cited “challenges” due to “continuous developments relating to the regulatory and other inquiries and investigations that are pending,” and liabilities from legal action and the bank’s liquidation process.

Silvergate says it is done filing 10-Ks, 10-Qs and proxy statements, in large part because of "the continuous developments relating to the regulatory and other inquiries and investigations that are pending with respect to the Company and the Bank" https://t.co/1EpkRKAixt pic.twitter.com/i1D6S1daGP
— Bank Reg Blog (@bank_reg) May 11, 2023

Silvergate determined it’s in the “best interests” of stakeholders to “minimize costs and expenses” to preserve value. Some of the staff to be cut include those that are “critical” in preparing these filings, the firm added.

On March 8, Silvergate Capital first announced it would voluntarily liquidate Silvergate Bank.

Days earlier, a line-up of crypto firms, including Gemini, Coinbase, Galaxy Digital and BitStamp, severed ties with the bank as it faced a Justice Department investigation over alleged ties to the collapse of FTX.

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