Silvergate Capital Corp., the parent company of the crypto-friendly Silvergate Bank, has agreed to a $63 million settlement with U.S. and California regulators. This settlement addresses accusations of internal management failings and the dissemination of misleading information to investors, which contributed to the bank's collapse in 2023 and exacerbated the industry's banking crisis.
Regulatory Actions and Allegations
The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Silvergate Capital Corporation, its former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino. The SEC alleges that the bank misled the public and shareholders about the effectiveness of its Bank Secrecy Act (BSA) and anti-money laundering (AML) program. The Federal Reserve and California's Department of Financial Protection and Innovation (DFPI) also brought charges against the La Jolla, California-based lender.
Settlement Details
Silvergate, along with Lane and Fraher, agreed to settlements without admitting or denying the SEC's allegations. The penalties include:
- $43 million from the Federal Reserve
- $20 million from the California regulator
- $50 million fine imposed by the SEC, which may be offset by payments to other regulators
The settlements are subject to court approval. Lane and Fraher also agreed to a five-year ban on serving as officers or directors of any public company.
Specific Allegations
The SEC's complaint highlighted that Silvergate failed to detect nearly $9 billion in suspicious transfers by major customer FTX, which filed for bankruptcy in November 2022. The complaint also noted that for most of 2021 and 2022, Silvergate did not conduct appropriate automated monitoring of its Silvergate Exchange Network (SEN), a key mechanism for crypto asset customers to transfer funds. This failure resulted in inadequate monitoring of approximately $1 trillion in banking transactions.
Internal Awareness and Misleading Disclosures
According to the SEC, Lane and Fraher were aware of significant deficiencies in the bank's BSA/AML compliance program through multiple examinations by the Federal Reserve Bank of San Francisco. Despite this, Silvergate's quarterly and annual reports (10-Q and 10-K forms) did not disclose these risk factors. A 2021 quarterly filing did acknowledge a "heightened risk" due to some crypto customers but failed to disclose specific deficiencies tied to BSA compliance.
Statements and Reactions
Antonio Martino, the former CFO, denied the allegations through his attorneys, stating that the accusations pertain to "judgment-driven" decisions tied to a single quarter in 2022. A Silvergate spokesperson told CoinDesk that the settlements are part of the bank's ongoing efforts to wind down. The spokesperson emphasized that Silvergate made a responsible decision to liquidate voluntarily in early March 2023 without government assistance. By November 2023, all deposits had been repaid to banking customers, and Silvergate ceased banking operations.
Industry Impact
Silvergate, once the go-to bank for major crypto businesses, voluntarily folded under the pressure of the sector's challenges. It was the first of three technology-tied lenders to shutter during the so-called crypto winter. Unlike Silicon Valley Bank and Signature Bank, which were seized and liquidated by U.S. authorities, Silvergate wound itself down without government intervention.
The loss of Silvergate and the other two institutions triggered months of U.S. banking turmoil, leaving digital asset companies scrambling for financial relationships as crypto fell further out of favor. Silvergate's rapid rise from a small community bank to the digital assets sector's leading financial partner was matched by an equally swift descent. The end came after a March 2023 securities filing revealed that the firm had accelerated sales of securities to raise cash to repay advances from the Federal Home Loan Bank of San Francisco. This was preceded by the loss of more than $8 billion in deposits from its crypto customers in the final months of 2022.
Conclusion
The Federal Reserve's inspector general concluded in an October 2023 report that Silvergate's management had been "ineffective," and federal regulators failed to adjust to the evolving business landscape. The $63 million settlement marks a significant chapter in Silvergate's story, highlighting the critical importance of robust internal controls and transparent communication with investors in the rapidly evolving crypto industry.
By addressing these regulatory concerns, Silvergate aims to conclude its operations in an orderly manner, setting a precedent for other financial institutions navigating the complex intersection of traditional banking and digital assets.
