Silvergate Bank Lands in the Middle of Another Massive Alleged Crypto Fraud – This Time at Binance

By Pam Martens and Russ Martens: June 7, 2023 ~

It’s only June 7, but the liquidating, federally-insured, crypto-loving Silvergate Bank is having one helluva month. On June 1, the Federal Reserve released an enforcement action (called a Cease and Desist Consent Order) that it and a California banking regulator had filed against Silvergate Bank and its parent, Silvergate Capital Corporation. (See our report: Disgraced Silvergate Bank Hints It May Not Be Able to Cover All of Its Deposits; Fed Slaps It with a Cease and Desist Consent Order.)

The bank had announced on March 8 that it was going to voluntarily wind down and liquidate itself. The announcement followed a run on the bank when news articles began appearing linking Silvergate Bank to indicted crypto kingpin, Sam Bankman-Fried. The bank is facing a growing roster of lawsuits on charges that it moved customer funds deposited at Bankman-Fried’s crypto exchange, FTX, to his hedge fund, Alameda Research, where they then went missing to the tune of billions of dollars to fund Bankman-Fried’s and other FTX executives’ lavish lifestyles.

Shareholders in Silvergate Bank’s parent, Silvergate Capital, which is publicly traded, have also lost their shirts. The stock traded at $105 last August. It closed yesterday at 97 cents.

Having a federally-insured bank’s name linked to one massive international crypto fraud is bad enough, but on Monday Reuters dropped a new bombshell. It reported that it has documents showing that Silvergate Bank was also involved in moving customer funds for crypto exchange Binance.US, by people who should not have had access to those accounts.

Also on Monday, without one mention of Silvergate Bank, the Securities and Exchange Commission filed 13 charges against Binance, its various affiliates, and its founder Changpeng Zhao, who is known as “CZ.”

In a statement accompanying the SEC complaint, the SEC specifically mentions “commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.” The SEC writes:

“The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain. The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (BAM Management) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume. Further, the Complaint alleges that the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.”

One could be forgiven for thinking that there are striking similarities between what Sam Bankman-Fried was doing and what CZ was doing – and both, coincidentally (or not), being aided and abetted by federally-insured Silvergate Bank.

The Federal Reserve Board was the primary regulator of Silvergate Bank. It had farmed out its bank examinations to the San Francisco Fed. Those same federal regulators and bank examiners were dosing when Silicon Valley Bank blew itself up on March 10.

These latest revelations that not one, but two, alleged master crypto fraudsters were having their way with customer deposits in a federally-insured bank will further erode confidence in the U.S. banking system.

It’s not that the Fed and other banking regulators did not have ample warnings that crypto was, itself, a giant fraud. One of the most respected investors in America, Warren Buffett, summed up Bitcoin like this in May 2018: Bitcoin is “probably rat poison squared.” In January of the same year, Buffett told CNBC in an interview that “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”

Also in 2018, Bill Harris, the former CEO of Intuit and PayPal, wrote a detailed critique of Bitcoin for Vox, under the unabashed headline: “Bitcoin is the greatest scam in history.” Harris opines:

“In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen. In a pump-and-dump game, promoters ‘pump’ up the price of a security creating a speculative frenzy, then ‘dump’ some of their holdings at artificially high prices. And some cryptocurrencies are pure frauds. Ernst & Young estimates that 10 percent of the money raised for initial coin offerings has been stolen.”

If Bitcoin is a pump and dump scheme, nothing has helped to perpetuate that scheme more than Bitcoin futures trading, which has very conveniently been accommodated by the CME Group and its equally accommodating federal regulator, the Commodity Futures Trading Commission (CFTC).

Harris also knocked down the idea that there is intrinsic value to Bitcoin. He writes:

“It helps to understand that a bitcoin has no value at all.

“Promoters claim cryptocurrency is valuable as (1) a means of payment, (2) a store of value and/or (3) a thing in itself. None of these claims are true.

“1. Means of Payment. Bitcoins are accepted almost nowhere, and some cryptocurrencies nowhere at all. Even where accepted, a currency whose value can swing 10 percent or more in a single day is useless as a means of payment.

“2. Store of Value. Extreme price volatility also makes bitcoin undesirable as a store of value. And the storehouses — the cryptocurrency trading exchanges — are far less reliable and trustworthy than ordinary banks and brokers.

“3. Thing in Itself. A bitcoin has no intrinsic value. It only has value if people think other people will buy it for a higher price — the Greater Fool theory.”

In July 2019, NYU Professor and economist, Nouriel Roubini, launched a scathing analysis of Bitcoin. In a Bloomberg interview, Roubini said this:

“Crypto currencies are not even currencies. They’re a joke…The price of Bitcoin has fallen in a week by how much – 30 percent. It goes up 20 percent one day, collapses the next. It is not a means of payment, nobody, not even this blockchain conference, accepts Bitcoin for paying for conference fees cause you can do only five transactions per second with Bitcoin. With the Visa system you can do 25,000 transactions per second…Crypto’s nonsense. It’s a failure. Nobody’s using it for any transactions. It’s trading one sh*tcoin for another sh*tcoin. That’s the entire trading or currency in the space where’s there’s price manipulation, spoofing, wash trading, pump and dumping, frontrunning. It’s just a big criminal scam and nothing else.”

Adding significant substance to these off-the-cuff remarks, in July of last year Wall Street On Parade reported that Over 1,600 of the Brightest Scientific Minds in Technology Have Signed a Letter Calling Both Crypto and Blockchain a Sham.

U.S. markets and the U.S. banking system were once the pride of this nation. Today, we mostly hang our head in shame.

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