- Silvergate Bank agrees to a $50 million civil penalty and an injunction following SEC allegations.
- Former executives receive five-year suspensions and monetary penalties without admitting wrongdoing.
Silvergate Bank’s Compliance Failures and SEC Settlement
The U.S. Securities and Exchange Commission (SEC) recently charged Silvergate Capital Corporation, the parent company of Silvergate Bank, along with former CEO Alan Lane and former Chief Risk Officer Kathleen Fraher, with misleading investors about the effectiveness of their regulatory compliance program for virtual currencies. On July 1, Silvergate agreed to a $50 million civil penalty and an injunction, settling the allegations without admitting or denying the charges.
Background on SEC Allegations
From November 2022 to January 2023, Silvergate Bank claimed to have a robust Bank Secrecy Act and Anti-Money Laundering (BSA/AML) program. They asserted continuous monitoring of high-risk virtual currency clients, including the now-bankrupt cryptocurrency exchange FTX. However, the SEC alleged that Silvergate’s automated transaction monitoring system failed to adequately oversee transactions on the bank’s payment platform.
SEC’s Enforcement Division Chief, Gurbir S. Grewal, emphasized that following FTX’s collapse, Silvergate did not disclose critical compliance deficiencies, thus undermining investor confidence. These shortcomings reportedly prevented the detection of suspicious transfers totaling approximately $9 billion between FTX and its affiliates. As a result, Silvergate’s stock price plummeted, erasing billions in market value for investors.
Impact on Silvergate Executives
Alan Lane and Kathleen Fraher also settled with the SEC, agreeing to a five-year suspension from executive roles and civil penalties of $1 million and $250,000, respectively. These settlements are pending court approval.
SEC and Virtual Currency Oversight
The SEC, established in 1934, oversees securities trading in the U.S., ensuring fair trade practices, protecting investors, and preventing market manipulation. It also determines the classification of virtual currencies as securities. Amidst a liquidity crisis triggered by FTX’s failure, Silvergate’s customer deposits linked to virtual currencies plummeted from approximately $13 billion in September 2022 to around $3.5 billion by December 2022.
Liquidity Crisis and Regulatory Response
In March 2023, Silvergate informed the SEC of potential capital deficiencies, prompting major clients like Coinbase and Paxos to cease operations with the bank, causing its stock price to crash. A forthcoming Federal Reserve report attributes Silvergate’s collapse to rapid growth, complex financial risks, and a business strategy heavily reliant on the cryptocurrency industry.
In response, the Federal Reserve, alongside the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), issued a statement urging banks engaged with virtual currency firms to manage associated risks. Additionally, in May 2023, President Joe Biden proposed a congressional resolution to repeal SEC Accounting Bulletin No. 121 (SAB121), which imposes stringent requirements on banks handling virtual currencies.
