The SEC has sued Silvergate Capital Corporation, accusing the bank of concealing its deficient anti-money laundering practices and colluding with FTX in fraud. Former executives are also charged with misleading investors. Silvergate has agreed to pay a $50 million penalty.

The Securities and Exchange Commission (SEC) has recently charged Silvergate Capital Corporation with concealing deficient anti-money laundering (AML) practices and collaborating with FTX, a prominent crypto trading platform, in fraudulent activities [1]. This significant move marks the latest development in the ongoing regulation of the cryptocurrency industry.

The SEC alleges that Silvergate, based in California, failed to implement adequate AML measures, which allowed the diversion of customer funds to Alameda Research LLC, a privately-held crypto hedge fund owned by former FTX CEO and co-founder Samuel Bankman-Fried [1]. Additionally, the SEC claims that Silvergate provided Alameda with special treatment on the platform, including an unlimited line of credit and exemption from certain risk mitigation measures [1].

This fraudulent scheme, which reportedly began in 2019, raised concerns about the safety and transparency of crypto asset trading platforms, as Silvergate was perceived as a reputable and responsible player in the industry. The SEC alleges that Bankman-Fried and his associates used commingled customer funds at Alameda to make undisclosed investments, purchase luxurious real estate, and make significant political donations [1].

The SEC's Chair, Gary Gensler, commented on the matter, stating, "We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto. The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action" [1].

This latest development in the regulation of the cryptocurrency industry underscores the importance of robust AML measures and transparency in the sector. It also serves as a reminder that even established players in the industry must adhere to securities laws and regulations to protect investors and maintain market integrity.

[1] + https://www.sec.gov/newsroom/press-releases/2022-219

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