In latest Silvergate Bank news, the fallen bank now faces a class-action lawsuit filed by FTX users, alleging the bank’s involvement in aiding fraud at the now-defunct digital asset exchange and its associated trading firm, Alameda Research.
Involvement With FTX
San Diego federal court Judge Ruth Bermudez Montenegro, in an order dated March 20, denied Silvergate’s motion for dismissal. It cites claims by the class group that the bank was aware of FTX’s fraudulent activities and unjustly profited from them at the expense of exchange’s users. It is important to note that soon after the collapse of the digital asset exchange in November 2022, Silvergate Bank faced financial troubles and filed for bankruptcy in March 2023.
Developments in Silvergate Bank News: Court Ruling
The court’s ruling noted that Silvergate was obligated to exercise care towards FTX customers, given that its Silvergate Exchange Network (SEN) was primarily designed to facilitate fund transfers to digital asset exchanges, with a notable emphasis on benefiting exchanges’ users.
The judge underscored the important role of the SEN in enabling the existence of exchanges like FTX, suggesting that without such infrastructure, their operation would have been nearly impossible. She highlighted the foreseeable risks associated with allowing FTX customer funds to be deposited into non-FTX accounts, noting the potential for fraud and harm to the owners of those funds.
The court noted that the bank had a “strong incentive to continue accepting FTX and Alameda customer deposits and executing transfers.” Notably, Silvergate derived substantial income from translation fees and interest accrued from FTX-related accounts, with its annual income experiencing a significant surge from $7.6 million to $75.5 million after initiating its banking services for the exchange.
Silvergate’s Argument
In its defense, Silvergate argued in its dismissal motion that it bore no duty of care towards FTX customers, attributing any withdrawal difficulties to the exchange and its co-founder, Sam Bankman-Fried, rather than its own actions.
Moreover, the bank contended that denying the exchange’s transfers would have prompted the exchange to seek alternative banking arrangements, a proposition dismissed by the court as “highly speculative,” given the limited options available for digital-asset-friendly banking services.
This legal saga unfolded over a year after the lawsuits were initially filed in February 2023, subsequently combined into one class action lawsuit against Silvergate in April. The court’s denial of the bank’s dismissal motion underscores the gravity of the allegations and sets the stage for a protracted legal battle that could have far-reaching implications for the industry at large.
Extent of Accountability
In the wake of these legal proceedings, questions linger regarding the extent of accountability for entities facilitating transactions within the digital asset ecosystem and the measures necessary to ensure investor protection and market integrity. As the case progresses, stakeholders closely monitor developments, with the outcome poised to shed light on the broader responsibilities of financial institutions in safeguarding the interests of their clients.
Amid these developments, a high-profile trial recently found Sam Bankman-Fried, the co-founder and former CEO of the defunct exchange, guilty of fraud and money laundering charges. His sentencing is scheduled for March 28.
