Crypto Fallout Deepens: Kwon's Fate Uncertain, Silvergate Sued for FTX Role

Silvergate Bank's Legal Woes Deepen Over Alleged FTX Fraud

Silvergate Bank, once a prominent player in the crypto industry, finds itself entangled in a legal battle as a federal judge greenlighted a class-action lawsuit alleging the bank's complicity in the fraud perpetrated by the now-defunct FTX exchange and its trading arm, Alameda Research.

Judge Ruth Bermudez Montenegro of the San Diego federal court denied Silvergate's dismissal bid, ruling that the plaintiffs – FTX users – had adequately alleged the bank's knowledge of the fraud yet chose to benefit from it, unjustly enriching itself at the expense of the users. The court's decision hinged on the recognition that Silvergate owed a duty of care to FTX customers, as its banking network was designed primarily to facilitate fund transfers to crypto exchanges like FTX.

Documents reveal that Silvergate not only banked both FTX and Alameda but also processed transfers that directed FTX customer funds into Alameda's accounts. Notably, FTX lacked its own bank account initially, prompting customers to wire their funds directly to Alameda. The judge asserted that allowing customer funds to flow into non-FTX accounts was a foreseeable risk that could lead to fraud and harm the owners of those funds.

Silvergate's incentives, the court noted, were closely tied to the adoption and success of FTX's platform and app, as the bank's business model revolved around facilitating transactions for the exchange. This dynamic fueled Silvergate's continued acceptance of FTX and Alameda customer deposits and transfers, propelling its annual income from a mere $7.6 million before FTX to a staggering $75.5 million after banking the exchange.

In its defense, Silvergate argued that its dealings were not a substantial factor in preventing FTX customers from withdrawing their funds – a responsibility that lay squarely on the shoulders of FTX and its co-founder, Sam Bankman-Fried. The bank further contended that, had it denied FTX's transfers, the exchange would have simply found another banking partner, a claim the judge dismissed as "highly speculative" given Silvergate's status as one of the few banks servicing the crypto industry.

This legal saga unfolds more than a year after the initial lawsuits against Silvergate were filed in February 2023, mere months after FTX's monumental collapse into bankruptcy in November 2022. Silvergate itself crumbled a month later, in March 2023, adding to the cascading effects of the FTX debacle on the crypto ecosystem.

In a parallel development, John J. Ray, the current CEO overseeing FTX's bankruptcy proceedings, has contested claims made by the platform's former CEO, Sam Bankman-Fried, and his defense team. In a letter to Judge Lewis Kaplan, Ray refuted their assertions regarding FTX's financial state during the Chapter 11 filing and the extent of Bankman-Fried's personal losses. 

Ray's team has dedicated a year to stabilizing FTX from a severe crisis, aiming to position the company for a reorganization plan that could significantly benefit creditors. However, Ray emphasized that the bankruptcy process alone would not fully compensate creditors and investors due to Bankman-Fried's fraudulent activities, underscoring the gravity of the situation.

Conclusion

Do Kwon's extradition to South Korea is on hold while the Montenegrin Supreme Court decides who gets to try him. Meanwhile, his company faces a US SEC trial next week. Silvergate Bank's legal woes deepen as a judge allows a lawsuit accusing them of being complicit in FTX's fraud to proceed.