Silvergate Bank is contending with a class action lawsuit initiated by customers of the defunct cryptocurrency exchange FTX, accusing the bank of contributing to fraudulent activities connected with FTX and its sister firm Alameda Research. Rejecting Silvergate’s appeal for dismissal, a federal judge in San Diego, Ruth Bermudez Montenegro, ruled that the plaintiffs had adequately claimed that Silvergate turned a blind eye to FTX’s fraudulent practices, leading to unjust enrichment at the users’ expense.
Bank’s Predicament Intensifies
The court denoted the Silvergate Exchange Network (SEN), a system designed to enable transfers to crypto exchanges, as essential for FTX operations, implying Silvergate’s responsibility towards protecting FTX clients’ interests. The network processed transactions which inadvertently channeled user funds from FTX to Alameda. With FTX lacking its own bank account initially, customer transfers were made directly to Alameda’s account, suggesting potential negligence.
The ruling suggests that Silvergate profited from the relationship, noting an increase in annual revenue from $7.6 million to $75.5 million following the incorporation of the exchange platform. These gains were attributed to transaction fees and interests from FTX-associated accounts.
Unpacking the Legal Judgement
Silvergate had argued in its dismissal motion that it owed no duty to FTX clients, attributing the inability of customers to withdraw funds directly to FTX and its co-founder Sam Bankman-Fried, rather than bank transactions. The court refuted this claim, emphasizing that Silvergate’s rejection of FTX’s transactions was not an insignificant factor and highlighted Silvergate’s unique position as one of the few banks willing to service the crypto sector.
The lawsuit’s progression follows a year after its initial filing in February 2023, with the consolidation of three separate class actions against Silvergate in April and the bank’s subsequent bankruptcy declaration in March 2023. This closely trails the bankruptcy of FTX in November 2022. Bankman-Fried has since been convicted on fraud and money laundering charges and awaits sentencing.