Signature Bank Faces Lawsuit Over Involvement in FTX Fraud

In Brief

• New York-based Signature Bank faces a lawsuit from British Virgin Islands-based algorithmic trading firm Statistica Capital.
• Statistica Capital said that Signature knew that FTX customer funds were not segregated from Alameda funds.
• Silvergate Bank faces an SEC inquiry over similar charges.

Algorithmic trading firm Statistica Capital filed a putative class-action lawsuit against the crypto-friendly Signature Bank for its alleged knowledge of fund commingling between bankrupt exchange FTX and Alameda Research.

Statistica alleges that against its advice, Signature Bank sent money intended for FTX to Alameda’s bank accounts using its Signet payments network starting in June 2020. Signet, a permissioned blockchain network, enables round-the-clock money transfers through the minting and burning ERC-20 compliant “signet tokens.”

Statistica Alleges Signature Bank Failed in its Fiduciary Duty
According to Statistica’s court filing, FTX transferred customer deposits from Alameda accounts using a “nonlegal tender” called “e-money.” While FTX customers could confirm funds had been added to their accounts, Statistica alleges that customer funds hadn’t left Alameda’s accounts. FTX and Sam Bankman-Fried allegedly used customer deposits to extend loans to Alameda, going so far as to offer the bankrupt hedge fund a $65 billion credit line.

The commingling of FTX customer funds with Alameda’s money is at the heart of a criminal case against former FTX CEO Sam Bankman-Fried, who faces eight charges in the U.S., including money laundering and wire fraud. In a separate civil complaint, the SEC has sued Sam Bankman-Fried for misrepresenting FTX’s relationship with Alameda to investors.

According to Statistica, Signature knowingly processed transactions violating FTX’s terms and conditions and failed to fulfill its fiduciary role to customers.

Yesterday, Binanceannounced plans to suspend bank USD transfers on Feb. 8, 2023, for undisclosed reasons. Earlier, it notified customers that Signature Bank would only support SWIFT transfers of $100,000 or more between itself and Binance customers, lending credence to speculation that suspensions were related to Signature Bank.

Centralized Exchanges Left With Fewer Options to Fulfill Critical Role
The ground is slowly shrinking under the feet of the world’s most centralized exchanges as banks spooked by regulatory warnings and crypto collapses look to distance themselves from the industry. Centralized exchanges serve as crucial fiat-to-crypto on-ramps for crypto traders and investors. The mass exodus of banking partners could affect exchanges’ ability to survive ongoing market stress.

Signature Bank announced in early December 2022 that it would cut its crypto-related deposits by $8-$10 billion, with its CEO emphasizing that “we are not just a crypto bank.” It later borrowed $3.8 billion from Federal Home Loan Banks.

Last year, Provident Bancorp, a Massachusetts bank, sold impaired loans made to crypto miners to cut its digital asset portfolio by 50%. In Q4 2022, the company reduced loans backed by mining rigs by 40% compared to Q3 and expects to continue reducing its crypto portfolio in 2023.

New York-based Metropolitan Bank announced it would close its crypto vertical on Jan. 9, 2023, due to “material changes in the regulatory environment.” Metropolitan had to return money to the customers of Voyager Digital, a Canadian crypto brokerage that filed for bankruptcy last year.

Silvergate Wants to Be the Last One Standing, but Is That Good for Crypto?
U.S. prosecutors have launched an inquiry into the role played by crypto-friendly Silvergate Bank in the FTX fraud. Silvergate allegedly enabled large fund transfers across its Silvergate Exchange Network without adequate monitoring. In 2017, Silvergate Capital developed the Silvergate Exchange Network to allow fiat-crypto transfers between crypto firms and investors, provided both did business with Silvergate.

Silvergate recently survived an $8.1 billion run on deposit withdrawals by selling securities and derivatives and borrowed $10 billion from home-loan banks to strengthen its financial position. Silvergate CEO Alan Lane, who turned the bank from a predominantly real estate firm to a crypto-focused firm in 2013, wants to assure the crypto community that the bank will not capitulate soon.

“What we’re trying to communicate is that we are here; we are here for the long haul,” said CEO Alan Lane in late January 2023. Analysts have also suggested that Signature Bank’s Binance transfer restrictions mean it could cede market share to Silvergate.

However, crypto exchanges will hope that more banks come on board to reduce the chance of a single failure point.

Disclaimer
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.