SEC takes action against crypto-friendly bank Silvergate

Silvergate Capital Corp., the parent of the crypto-friendly bank that collapsed in 2023, has agreed to pay $63 million to settle charges by U.S. and California regulators. These accusations were mostly related to internal management failures and giving false information to investors. Silvergate Bank, known for its crypto friendly stance, launched the Silvergate Exchange Network (SEN) in 2017. This technology allowed crypto firms and investors to transfer U.S. dollars between major crypto trading firms efficiently. However, the SEC later revealed that the bank had serious deficiencies in its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. SEN transactions were not monitored automatically for suspicious activities for a 15 month period from 2021 to 2022. The bank had close ties with the now bankrupt crypto exchange FTX. This led to a run on customer deposits at Silvergate in late 2022. Under immense pressure, Silvergate decided to liquidate voluntarily without government assistance, marking the first in a series of crypto related bank closures during the so-called "crypto winter." By November 2023, Silvergate had repaid all deposits to customers and soon after ceased banking operations. The SEC's allegations detail Silvergate's failure in monitoring and transparency. Silvergate allegedly neglected to monitor approximately $1 trillion in transactions through SEN, including nearly $9 billion in suspicious transfers by FTX. Despite the past warnings received from government examiners about their insufficient efforts, Silvergate's reports falsely claimed there were no significant risk factors. A 2021 filing mentions some risks but failed to show specific deficiencies in compliance programs known to its executives. The settlement involves significant penalties for the bank and its executives. Both former CEO Alan Lane and former COO Kathleen Fraher settled, agreeing to permanent injunctions. They will be barred from serving as officers or directors of any public company for five years. The executives will also face substantial fines of $1 million and $250 000, respectively. However, former CFO Antonio Martino chose not to settle with the SEC. Importantly, the parties reached these agreements without admitting or denying the allegations. This can help in closing the investigations and easing the bank's ongoing liquidation process. Despite its collapse, Silvergate's story serves as a critical lesson in the risks and challenges of the crypto banking sector.