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Silvergate the Bank in the Middle of the Web


Coinbase has seen a most wonderful week in its stock price with Coin rising 20%, though still down some 80% since its all time high.

Microstrategy (MSTR) is up 30%. Riot has gone nuts with the bitcoin miner gaining 68% in the past week.

All have outperformed bitcoin, up 4% and eth, up 10% in the past week with even Silvergate seeing a brief green on Tuesday, though down 30% on the week.

This little known bank is in the middle of the entire November debacle, though on the fiat side.

It was a tiny local US bank, until Barry Silbert, the CEO of the Digital Currency Group (DCG) bought its shares in a private placement in 2018.

Since then Silvergate has quietly grown to become a giant of sorts, handling $160 billion in crypto related transactions in 2021, and now is publicly traded.

This 2023 however, their deposits have fallen to $3.8 billion as of December 31 from $11.9 billion just months prior at the end of September, with $8 billion so vanishing in months around the same time as FTX collapsed.

“In light of recent industry dynamics, including customers moving to a risk-off position across digital asset trading platforms, total deposits from digital asset customers declined to $3.8 billion at December 31, 2022, compared to $11.9 billion at September 30, 2022,” Alan Lane, Silvergate’s president and CEO, said.

Yet just this November, Silvergate stated that “Silvergate’s total deposits from all digital asset customers totaled $11.9 billion, of which FTX represented less than 10%.”

That amounts to about $1 billion with Silvergate now under enquiries regarding whether they knowingly transferred FTX’s customer funds to Alameda.

“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients.

The public is owed a full accounting of the financial activities that may have led to the loss of billions in customer assets, and any role that Silvergate may have played in these losses,” wrote U.S. Senators Roger Marshall, M.D., Elizabeth Warren (MA) and John Kennedy (LA) in a letter to Silvergate.

All of which would have been background development on somewhat old news where the crypto market is concerned, but the involvement of Silbert in having a significant stake in this bank may make it relevant in regards to the ongoing Genesis dynamics.

In particular there are rumors Barry Silbert and Sam Bankman-Fried, the former CEO of FTX, were close. Silbert however sort of claims otherwise stating in a letter to shareholders:

“DCG made a small equity investment of $250,000 in FTX’s Series B in July 2021… DCG held a trading account with FTX with less than 1% of all our trading volume transacted on that platform.

Barry has no personal or professional relationship with Sam Bankman-Fried. Aside from a conversation in the Summer of 2022 and a few emails at the time.”

Summer 2022 and this is DCG itself. In the letter, Silbert portrays DCG as a kind of Venture Capital vehicle that sort of has nothing to do with its subsidiaries.

It does not therefore clarify what the relationship of their wholly owned subsidiaries may have been with FTX, but it does state:

“Genesis had a trading and lending relationship with Three Arrows Capital, and Three Arrows Capital defaulted on its loans from Genesis. Separately, Three Arrows Capital was an investor in various Grayscale products.”

This in effect confirms the accusations of the Winklevoss twins that Genesis was reckless in lending to Three Arrows because the latter was pumping GBTC, another DCG wholly owned subsidiary and their main cash cow.

The Summer 2022 conversations and emails may also add to speculations that DCG and/or its subsidiaries colluded with FTX as Zhu Su, the founder of the now defunct Three Arrows hedge fund, says:

“FTX and Genesis abused their fiduciary privileges and hatched a multi pronged coordinated attack on Luna, including acting interested in and asking to be party to each private bailout attempt for Luna, only to immediately afterward aggressively sabotage any possible recovery plan.”

In addition, Zhu and some others also claim that “FTX returned $2.5 billion of loans to Genesis in August, and Genesis likely knew or should have known these came from FTX depositor funds both via chain analysis and via asking for financial information.”

If a court found that in fact to be the case, then Genesis may have to return that $2.5 billion, increasing its hole to $4.5 billion, circa $2 billion of which is owed by DCG itself.

That payment of $2.5 billion is thought to be in bitcoin, but that Silvergate had $1 billion in November belonging to FTX suggests Silvergate was FTX’s primary bank.

Although that bank is now publicly traded, it was welcomed to the “DCG family” in 2018, and therefore raises the question whether, on the fiat side, Silbert or others at DCG and Genesis had a clear view of FTX’s and Alameda’s finances, as well as their shenanigans.

Some suggest investigations at FTX are leading investigators to this DCG web, and based on the facts available, it appears quite clear that FTX and the DCG web had significant relationships, including private conversations and emails between Silbert and Sam Bankman-Fried in the middle of the first happenings during summer.

Whether much will come out of it however is unclear, but Silbert claims “DCG effectively assumed Genesis’s risk of loss on the Three Arrows Capita.”

They gave a promis-sory note, which is basically a letter that says DCG owes Genesis $1.1 billion to be paid in a decade, without any actual money moving and it can’t be called. Why can’t it be called – does DCG actually have the money – and in the absence of that, what’s the point of this note exactly?

Silbert says they did give “$340M of new equity across Genesis entities to provide it with additional capital,” but that falls far short of $1.1 billion with the Winklevoss twins now potentially having standing of being misled.

DCG therefore does not quite appear at arms length where it concerns Genesis because of this promissory note, which Silbert even now claims it assumed debts when in fact it has not at present.

The Winklevoss twins however are not pursuing court proceedings for now, asking instead for a change in management and the resignation of Silbert.

Which way investigators may go is even less known, with a Federally insured bank now involved in all this.


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