Elizabeth Warren wants regulators to investigate bank ties to cryptocurrency

Senate Democrats are pushing for financial regulators to investigate the ties between banks and cryptocurrency firms after FTX's bankruptcy revealed investments by FTX and Alameda Research executives in small banks. 

Sens. Elizabeth Warren, D-Mass., and Tina Smith, D-Minn., on Wednesday sent letters to the Federal Reserve chief, FDIC, and Comptroller of the Currency demanding that the agencies provide the names of banks serving cryptocurrency firms, the total dollar volume of loans to such firms, and information on whether regulated banks are engaging in trading crypto assets or derivatives. 

"Banks' relationships with crypto firms raise questions about the safety and soundness of our banking system and highlight potential loopholes that crypto firms may try to exploit to gain further access to banks," the senators wrote. 

"While the banking system has so far been relatively unscathed by the latest crypto cash, FTX's collapse shows that crypto may be more integrated into the banking system than regulators are aware," the letters stated.  

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The letters, first reported by Politico, come as Warren and other lawmakers on Capitol Hill have called for investigations and heavier regulations of the crypto industry after the collapse of FTX, once the second-largest cryptocurrency exchange valued at $32 billion. Former FTX CEO Sam Bankman-Fried faces numerous allegations of impropriety and legal repercussions over his role in the liquidity crisis that forced the company to file for bankruptcy. 

Of interest to Warren and Smith are reports that Bankman-Fried's hedge fund, Alameda, bought an $11.5 million stake in a small Washington state-based bank called Farmington State Bank – since renamed Moonstone Bank – which was more than double the bank's worth at the time. The New York Times reported the bank's parent company, FBH, is linked to the Bahamas-based Deltec Bank. FTX is also based in the Bahamas. Deltec's chief client, Tether, is a crypto company with $65 billion in assets, the report said.  

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A former president of the Independent Community Bankers of America who spoke to the Times was surprised regulators permitted Alameda's investment. 

"The fact that an offshore hedge fund that was basically a crypto firm was buying a stake in a tiny bank for multiples of its stated book value should have raised massive red flags for the FDIC, state regulators and the Federal Reserve," said Camden Fine, who now works as a bank industry consultant. "It’s just astonishing that all of this got approved."

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The senators also called out other banks facing scrutiny after FTX collapsed, including Silvergate Capital Corp., Provident Bancorp Inc., Metropolitan Commercial Bank, Signature Bank, and Customers Bancorp Inc.

Questions have been raised over what role Silvergate Bank played in the transfer of as much as $10 billion of FTX funds over to Alameda. Documents from the company's bankruptcy case indicate that FTX, some of its affiliated firms, and the Alameda Research hedge fund all banked with Silvergate.

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A bipartisan trio of senators on the Senate Banking Committee sent a letter to Silvergate on Tuesday requesting information about its role in the FTX-to-Alameda transaction. The senators' letter noted that Silvergate's depository services extended to Alameda and FTX "appears to be at the center of improper transfers of customer funds."

Sens. John Kennedy, R-La., Roger Marshall, R-Kan., and Elizabeth Warren, D-Mass., wrote: "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."

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Silvergate says it conducted significant due diligence on FTX and Alameda research both during the onboarding process and through ongoing monitoring, in accordance with risk management policies and procedures. The company added in a statement released Monday that it operates in accordance with the Bank Secrecy Act and the USA Patriot Act.

"It has been a very difficult few weeks for the digital asset industry, as we have all come to terms with the apparent misuse of customer assets and other lapses of judgment by FTX and Alameda Research," Silvergate said. 

But the senators noted that Silvergate's average deposits are down over $2 billion since September. In addition to FTX, another client of Silvergate that has entered bankruptcy amid the crypto contagion is BlockFi – which was brought down by its exposure to FTX but appears to have had better corporate controls than FTX per its bankruptcy filings.

Congress will hold hearings on FTX's collapse next week as lawmakers push for answers and possible legislative action to crack down on crypto. 

FOX Business' Eric Revell contributed to this report.