(Kitco News) -
The United States Justice Department (DoJ) is investigating Silvergate Capital’s relationship with bankrupt crypto exchange FTX and sister hedge fund Alameda Research, according to a Bloomberg report published late Thursday.
Silvergate, the California-based bank which specializes in serving cryptocurrency companies, is being probed by the DoJ’s fraud unit, which is looking into their “hosting of accounts tied to Sam Bankman-Fried’s businesses,” according to the report.
Alameda first opened an account with Silvergate in 2018, years before Sam Bankman-Fried founded FTX. The bank said it is “reviewing transactions involving accounts associated with FTX and Alameda” and claimed that it conducted “due diligence” on both companies when they were onboarded and ongoing monitoring while the accounts were maintained.
The Justice investigation has been ongoing for several weeks now, and is focused on possible money laundering activities, but remains in its early phases, and the bank has yet to be charged with any wrongdoing.
Silvergate was recently forced to liquidate debt that it was holding on its balance sheet to keep up with $8.1 billion in customer withdrawals during Q4 2022 and lost $718 million in the process – a sum that surpassed all of the firm's profits since 2013. They saw their crypto-related deposits drop by 68% in the fourth quarter of last year.
The company also dismissed around 200 employees – roughly 40% of its total personnel – and had to scrap the launch of its own digital currency project, resulting in a write-off of approximately $196 million.
Following the bank’s struggles, rating firm Moody’s Investors Service downgraded Silvergate's rating from Baa2, which was “lower-medium grade,” to Ba1, which is considered “junk,” and noted that the outlook moving forward for both Silvergate Capital and its bank is negative.
And a class-action lawsuit was filed on Jan. 10 claiming that Silvergate’s platform failed to detect instances of money laundering “in amounts exceeding $425 million,” for which the company was likely to face regulatory repercussions.
The FTX bankruptcy is one of the main sources of Silvergate’s woes as FTX, Alameda and other companies controlled by Bankman-Fried accounted for about $1 billion of the bank’s deposits.
Following the announcement of the criminal probe, Silvergate’s stock price fell by over 20% after hours on Thursday, erasing much of the 29% gain it made during the regular trading session. At the time of writing, it was trading at $19.55, down 7% on the day.
