How Will the FTX Collapse Affect Silvergate? A Bear and a Bull Debate - Ep. 431

Transcript

hey y'all some of you may have heard that silvergate bank the leading bank for the crypto industry is facing challenges after ftx's implosion it's one of the most shorted stocks has changed its Chief risk officer which is a role focused on fraud and it's been releasing public statements weekly to try to quell the markets in this episode we heard from veteran short seller Mark cohores and crypto banking Insider RAM alawalia on y for Mark he believes that this is only the beginning of silvergate's troubles and why for ROM he believes silvergate won't go down it was an intense and fascinating discussion with great points by both sides I think we'll have to see how events play out before we can see who was right

all right now on to the show just a quick note before we begin Unchained is doing its annual survey head to surveymonkey.com R Unchained 2022 to tell us how you think we're doing and how we could improve whether it be on the podcast in the newsletter or in our premium offering looking forward to hearing your thoughts again the link is surveymonkey.com R Unchained 2022 and you can also check the show notes for the link thank you hi everyone welcome to Unchained your no hype resource for all things crypto I'm your host Laura Shin author of The cryptopians I started covering crypto seven years ago and as a senior editor at Forbes was the first mainstream media

reporter to cover cryptocurrency full-time this is the December 13th 2022 episode of Unchained are you getting more questions than ever from your crypto curious or skeptical friends send them like crypto explainer on Ted at go.ted.com Laura shin defy saver is an all-in-one management app with unique automation options for top lending protocols such as Ave maker liquidy and compound check them out on ethereum mainnet arbitrum and optimism chain analysis demystifies cryptocurrency by providing industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like Gemini crypto.com and block fi

maximize your potential with the leading blockchain data platform by visiting chainalysis.com Unchained Minima is a new layer 1 blockchain designed to run in full on a smartphone join over 300 000 minimum node Runners on the incentive program today to start earning every month until main net launch get your node set up at minima.global buy earn and spend crypto on the crypto.com app new users can enjoy zero credit card fees on crypto purchases in the first seven days download the crypto.com app and get 25 with the code Laura Link in the description today's topic is the financial situation at silvergate bank here to discuss are

Mark cojones individual investor and former hedge fund manager and ROM alawalia CEO and co-founder at lumita welcome Mark and ROM thanks for having me Laura silvergate bank has been an important bank for the crypto industry giving access to the traditional Financial system to crypto companies including exchanges such as coinbase hedge funds Venture Capital firms Etc it started off as a real estate Bank back in the day but began switching to crypto in 2016 and from 2020 to 2021 deposits at the bank Quinn tupled from 2 billion to 10 billion and stock price also sky rocketed from 12 to 200 a share but now it's trading at about twenty dollars after the collapse of one of its clients

FTX but before we dive into all the details on what's going on with silvergate why don't we have each of you give your backgrounds so the audience understands how your perspective here is relevant to the situation Mark why don't you go ahead and begin so I'm a 62 year old fellow I used to be in the hedge fund business um I'm not as I would say retired I'm still an investor but most people know me as a short seller and Market skeptic I'm a googleable guy I've exposed significant frauds going back from the 80s till as recently is

I think 2018 which is something called my Medics or the CEO and CEO went to jail and you were calling out FTX back in what was it September and October yeah yeah I'm just getting I'll get to FTX in a minute yes for my background but there have been some Harvard Business School cases written about me about exposing subprime mortgage fraud and and various things and I think I've put numerous people in prison probably more than anyone on the on the planet from a forensic analysis standpoint I started calling out FTX on Twitter back in May and probably I'm the only one who who publicly went after them with a with a hatchet and ax

but was largely ignored the mainstream media here did a horrifically bad job in in following through so that's sort of a little bit about me and I have a a very strong and negative point of view on silvergate as it as it relates to their practices and how they go about doing their business that's just a little bit about me I tend to be um I tend to be vocal and I don't sort of give up till things of sort of cleared themselves through so I'm just not a one of these people who say something and just drop it and move on which is great Ron what about you

thank you Laura first off Mark pleased to meet you I've tracked your research going back to novastar and of course you've made a killing this year in carvana uh in a former life 10 years ago as an investor in carousdale I'm sure you know who they are and I'm friendly with Folks at Hindenburg uh so you made a killing this year you're having probably one of the best years you've ever had I respect your analysis although I do think you've overextended we'll get we'll get into that but I appreciate the points and the contributions you've made especially in Klein out FTX well ahead of anyone else out there on my background briefly Banking and capital markets in a nutshell so I grew up at Banks as an executive at Bank of America as an operating executive and also at Maryland

Lynch I was at Maryland during the 2008 financial crisis literally lived on Wall Street so the limos pull up at Maiden Lane and take a leave it under that weekend so it's very up close for me I was also shorting Fannie Mae and Freddie Mac due to the solvency issues so I'm sympathetic to some of the arguments um that one can make around insolvency more recently I was the executive at Cross River Building the crypto business our clients included coinbase and other leading exchanges and I co-founded lumita which is a digital Asset Advisory firm and my colleagues come from Goldman Sachs Merrill Lynch and also include a bank regulatory attorney who's the CEO of a Trust Bank in terms of Regulation I've done teach-ins at the U.S

Securities Exchange Commission I corroded an op-ed with SEC chair Arthur Levitt and I've written comments and have been recognized by U.S treasury a few times also the FDIC was a client of a prior company I started called priq they issued a press release there so I hope I'm googleable what all to say is that I'm credible on bank and Regulatory matters all right so then let's have each of you maybe just explain like I started to talk about you know what silvergate is and why it's important to the crypto industry but I don't know if there's anything either of you want to add on there and then after that we can kind of get into your views on it because you know from what I can tell so far you know Mark is bearish as uh he

indicated and ROM your I think more bullish so maybe just each of you explain like why you think it's even important to discuss this at all why crypto people should know about it and then we can go into the arguments well Super Dave sort of stuck out to me because the guy who runs it Alan Lane I think is beyond incompetent he brags about doing due diligence brags about all his processes brags about everything that he does right but he had SBF as his spokesperson on the website till SBF had trouble and then SBF everyone knows of his issues he then switched to having someone from bittrex be his spokesman in bittrex is

probably almost as big a scam as ftx's so you know once you can call it an accident to you know you're you're sort of guilty of in my mind sleeping at the switch and when called out about bittrex silvergate took this thing down and when you look at the employees at silvergate there's no one who has what I would call pedigree who can actually pull this off there's no one there like ROM who's an experienced soul the Alan Lane's son-in-law used to be the head of risk and was replaced in early November

and from former employees I've talked to there's numerous family members there in key positions one more incompetent than the next so really silvergate was a sleepy Regional small Bank in La Jolla about 40 million in assets and they were talked into banking for crypto and from what I can gather again through some of the stuff I've done and talking to some people who used to work there and some people who compete with them their systems are inadequate uh the people there don't know their ass from first base they got in huge trouble with FTX their

trouble has just begun they're going to have issues with bittrex they've had issues with other exchanges which they're not disclosing and I think The Regulators have been woefully behind uh in terms of looking at things and when they catch up I think they're going to dig deep here they're going to look at the trillion dollars that the send network has passed through and trillion dollars is a lot of money and I think they're willfully deficient in kyc and AML practices and their Book value is vastly overstated they have probably 500 million dollars of assets that they admit are over overvalued and

when they run that through the income statement and Book value book value goes from 35 to 20. so I think the bank is going to be in runoff I think they're going to be in court from this FTX matter from now till when my grandkids are my age and I think there's nothing there I think it was a it was an idea that was good at the time I think it got out of control I think it grew way too fast and now with FTX and others hitting the wall I think silver Gates deposits are going to go from I think they peaked at 15 billion 13 billion somewhere in there think they're going to go back down to where they

started and and real guys are going to come in and do this business rather than them I think that's been sbny said last week they want to sort of get out of the business or cut away back and they know what they're doing I mean their controls are superior to a silvergates from a stock standpoint you don't have to short it I'm short the stock you don't have to short it but if you own the stock I think you need your head looked at at least from now until six months from now to where the Smoke Clears or the bank has issues so we'll see and rum I know that you have a different position what's your view sure well I'll I won't react to Mark's

comments I'm sure we can get that into q a and really focus on those different topics and cycle through them but I'll start by streaming up silvergate and then I'll cycle through how a regulator would look at silvergate in terms of capital asset quality management earning liquidity sensitive to sensitivity to Market risk factors and my conclusion from all of that is that at least as of September 30th Regulators did view silvergate in good standing and of course there are some bumps in the road related to FTX and we'll come back to that but first off silvergate so they're the leading crypto Bank exchanges hedge funds and asset managers have an account there so that Silver Gate can enable book transfers 24 7 and still Brigade

plays a vital essential role to enable the movement of money including stable coins and Mark alluded to this in terms of the velocity of payments exposing to the need for their business model on the platform it's important to say a few Clarity viewpoints of clarity here one is sofa gate does not hold any crypto on its balance sheet and that's first off that's illegal so the gate cannot hold any Krypt on its balance sheet a supergate holds deposits and their deposits are concentrated around these crypto companies also the loans silvergate has to crypto firms are over collateralized 2.5 x and that send leverage program has experienced a zero percent in credit losses since Inception

through December 9th which I believe was this past Friday so let me just cycle through a couple of the the key areas here one is around the overall company I would say that silvergate maintains a high quality High earning asset base consisting primarily of uh government-backed mortgage-backed Securities treasuries cash and they also have a diverse stock funding base although it's true that's come under pressure in recent months on the credit assessment silver against assets again their High credit quality they're mostly liquid and they have very low duration risk due to the floating rate nature or silvergates usage of derivatives uh silvergate has about 15.5 billion in

assets uh and again uh crypto lending exposure is less than two percent and that's already over collateralized zooming into the asset side of the balance sheet they have almost two billion dollars in cash as of September 30th they have 1.3 billion U.S treasuries they've got six and a half billion in U.S agency sponsored debt they also have three billion dollars in Union bonds so zooming out they're taking credit risk on the full faith and credit of the U.S government which I have confidence you know will will pay you on the liquidity side we've done a stress test analysis crypto deposits without a decline something like 93 in order for there to be a real

issue and the reason why is silvergate has access to multiple sources of funding they can pledge eligible collateral to the fhlb the federal home loan Banks they can pledge to the Federal Reserve also they can sell those liquid marketable Securities we've talked about into the open market and not incur in impairment finally they can issue certificates at a policy which they've done in recent weeks to address any issues around customers withdrawing I'll conclude more on the earning side so silvergate has net income of 100 million plus in the first nine months of this year it's a 77 growth rate reflecting the growth rate of the category of

course we'd expect those earnings to come down and growth rate to slow as our funding costs improve but they have a significant amount of fee income they have net interest income and that net interest income is on is on good credit so I'll pause there okay well I think because we didn't fully get into the FTX thing but that's probably what most people are wondering about this is kind of at least for me like one of the biggest questions so obviously at this moment I granted like new facts are coming out pretty much every day but it looks like customer funds at FTX were inappropriately you know against the terms of service on a platform sent to the trading shop Alameda and Mark called this out when he was talking about what

his views are on silvergate like I guess I was kind of wondering so Mark are are you saying that when you're looking at the or when you have concerns about it kycaml are you saying that somehow deficiencies in the kyc AML process add still forget either allowed that or like somehow enabled the transfer of those funds or or are those unrelated okay that's that's a good question first I want to just take a few things that ROM said I mean one ROM says as of 9 30. you know that's like saying the Titanic was a great ship till it sank 9 30 9 30 doesn't mean jack here because there was a catastrophic event in early

November and the and the business silvergate's business has absolutely imploded since 9 30 so 9 30 doesn't matter and when Ron says asset quality silvergate has a one billion dollar impairment some of which they get to run through the balance sheet holding these mortgages governments and things like that they're they're one billion dollars in the hole a lot of this they've yet to run through Book value or the income statement when they run this through the income statement the losses here are going to be catastrophic so it doesn't matter what what anyone thought of silvergate as of 9 30. right now we're at 12 30 12 11 and and and the

bank is an absolute mess they're having to put out press releases every 10 days they're putting out updates every seven days they're going on the Cartoon Network which I call CNBC to sing for their supper the CEO has had his son-in-law as the head of risk of the bank till November 7th his son-in-law and he has numerous family members as employees so this Bank let me make it real clear it's completely out of control and is an absolute show they do business with people who they do not do not run through proper AML and kyc protocol and

the sheer amount of money that send transfers a trillion dollars just think of that everybody think of running a trillion dollars through a a network that runs 24 7 365. often asset based that is well below probably seven billion dollars as I I speak so that is before we'll address this Alameda thing with quick responses uh just Laura I just want to address a few things so one and of course Mark knows this silvergate does have a 500 million dollar recognition of losses against um certain assets on the balance sheet Mark is saying that there's another five for a million to go I'd love to see the documentation the evidence of that we

can follow up on that later I don't want to derail the interview but that's one they also have 1.3 billion dollars in stockholder Equity of course they are well capitalized and need their current regulatory reporting requirements the intra quarter updates is what Marx is bringing to us press release is true banks are on a quarterly reporting cycle and silvergate is going to the market and providing updated disclosures we'll get another quarterly report likely in January but they are updating disclosures the last thing they'll say on this is that blue Brigade is handicapped for example it's illegal for a bank to report on suspicious activity of one of their clients that's called a sorrow or suspicious activity report you're not even going to disclose to the client that you file the suspicious activity

report you shared with the regulator so there are some constraints around what silvergate can say publicly so you know there needs to be someone else like me that can do the analysis taken in a clinical independent view on the matter but but if in fact they were filing suspicious claim reports on Alameda or FDX why would they have SPF as their spokesman I mean you it makes no sense and it's the same thing with these bittrex clowns they're using them as spokesman till they're called out for doing illegal things and then they pull them down and this is short sellers calling them out not not ever not regular tools like yourself you you had no clue what these guys were up to you

guys have no clue what was going on there it took the Skeptics unearthing this thing and calling these guys out and when you run a business reacting to short sellers bringing up facts about your business you're you are destined to fail destined to fail and if you look at the balance sheet if and I and I can't you know I'm not at a computer I otherwise I'd call it up look for Securities held to maturity and security 30s available for sale and given the stress that they're under they're going to have to sell the Securities held to maturity and you said they could use that for liquidity so they have roughly half a billion dollars of Securities

held to maturity that they've yet to run through the p l or the balance sheet and when you do that book value goes from goes from 1.3 to about 800 million so so everyone thinking that is cheap based on Book value and you should know better ROM Book value for banks don't matter because Nova Star won the stock was three folks wrote off 77 a share in Book value so don't so Book value on banks especially distressed Banks don't matter Lehman Brothers book value didn't matter when it went under same thing with bear Stearns so so don't don't worry about Book value of a distressed situation and

first for a bank which was a sleepy Bank doing 40 million dollars of deposits with regional mortgages all of the sudden going to crypto where your son-in-law is the head of risk that just doesn't cut it that just doesn't cut it wrong if you're running a bank I don't think you're going to have your son-in-law be the head of risk I just don't it's just a huge black eye there are a few things about I'm not I'm going to focus clearly they're investing in the board and they're improving the management they have a new risk person and a Croc ROM the horse has left the barn the new risk person is as of November 7th right as of November 7th they have

Elizabeth Warren up their ass they have a bipart who's also signed off with Kennedy up their ass with questions they're not going to be able to answer I disagree with that look there's a lot of topics to unpack here I'm trying to you know Bob and weave through the like the uh the five attacks here on super gay and I'm happy to address them all in turn but let's add some structure and discipline yeah let's see yeah let's let's be a little more structured because one thing that I did want to ask about earlier when we were talking about their kyc AML program is Mark when you were saying like that they probably facilitated a lot of I don't know fraudulent transfers or something like that I was curious like for a client you

know if they have a crypto exchange that is initiating the transfer that money or you know a customer on that exchange then who is kind of the ultimate stop here when it comes to Regulators is it the compliance team at the exchange or is it the compliance team at the bank are they equally liable or how does that work both oh but the compliance team at the exchange you know in terms of FTX and Alameda were completely crooked I mean if anyone doesn't think that that's a criminal operation at FDX something's terribly wrong with you so FTX had no compliance Alameda had no compliance the truth regulatory officer at FTX was a poker a poker criminal right was a guy who

cheated people in cart he was the chief regulatory so assume there was no compliance at FDX and no compliance at Alameda and it's come out that that they co-mingled customer deposits as well so at a minimum when forensically everything gets Unwound someone is going to have their head so far up silver Gates asked they're not going to be able to see in every transaction will be scrutinized every transfer at the end of the day is going to get scrutinized here so so obviously I mean there's like five million investigations of FTX and Alameda so Regulators are clearly looking at that but will Regulators also probably

enforce something on silvergate like that's kind of what I'm asking about the kyc program and then we can it'll just create more structure for this so let me educate the audience here so you know silvergate has to have a BSA AML program in accordance with the US Patriot Act and Bank secrecy act so there's initial and then ongoing initial mean that there's a kyc and AML program also also known as a sip program a customer identification program and they'll have a various sets of activities including negative new screening and they will subject their clients to what's called enhanced due diligence particularly because in the crypto sector they will take extra efforts above and beyond a bank opening up a non-crypto account because of the nature and the potential

for higher propensity of illicit activity then there's ongoing activities so what the compliance team will do is they'll look at the nature of the customer's activities and they'll say if there's a change in Behavior just the change in Behavior then they further policy procedures should issue a suspicious activity report certainly notified their compliance team that suspicious activity report you know would go to the regulator and that's the standard framework for BSA AML compliant program now the question is were they in good standing first of all that's one way to look at it did the regulator view on silvergate change I can say that they must have been a good standing here's why first off they bought VM which was a stable coin issued or intended to be

issued by Facebook that requires regulatory approval Regulators have to prove an m a transaction they would not approve that if they thought silvergate's Equity was at risk or that that business activity would be untoward in some way second silvergate has no public consent order and they're permitted to grow their business they've not been directed to curtail that activity lastly in The Regulators regulator the FDIC has issued a non-objection require meaning if you're a bank that you want to be active in crypto you have to seek non-objection for the regulator Crypt at silvergate is acted in crypto which the inference is that they've obtained regulatory approval and The Regulators want to keep crypto activity within banks that they deem have the

appropriate systems and controls they don't want to spill this out to other Banks they want to keep scrutiny I agree with Mark that these transactions will be scrutinized and the scrutiny will be around did silvergate Faithfully apply and adhere to the stated policies and procedures in accordance with law one and two were those policies and procedures of sufficient stringency that's really the analysis The Regulators will do office transactions your your points are good but the problem is they're as of or before 9 30 in the Titanic sank in November that The Regulators nor no one stock coming that's the problem the problem is the analysis of this company is through the front window the front windshield rather

than the rear view mirror and everything you talk about is rear view looking yeah in the past prior to 9 30 they were in accordance I'd love I cannot wait to see what they're going to report come 12 31. I can't wait to see what those 12 30. and everyone is going to be Beyond surprised of the regulatory scrutiny that's going to come down on these guys then I can promise you Mark can I ask you a question do you do you believe there was any willful neglect at silvergate or do you believe is assistance and controls issues a failure to apply procedures or insufficient procedure I'm trying to just distinguish between willful they're they're when the final chapters written Allen Lane's

gonna say he was deceived as well he's he's gonna pull the benign the benign neglect what's your view do you think that silvergate was complicit somehow and engaged in a willful uh no I don't I don't think they were okay I don't think they were complicit okay so it's a controls issue it's a systems and controls policy procedure yeah I think I I think I think these guys were operating on 1990 technology 1990 procedures I think it's a publicly traded company that was run by a family-owned bank and I think these crypto exchange swindlers criminals took advantage of them essentially being like

a drug mule I think they found a sleepy bank that wanted to be become a big time player that that thought it was going to be simple That Grew like crazy that had zero controls they weren't in on it I don't think they were in on it now I think a couple directors are sideways and I think a couple directors are going to have problems and I mean just just think about it why would you have SBF as your spokesperson and then after SPF you go to another guy who has similar issues and when it's brought up by short sellers you decide to take that down now The Regulators are being handed

everything I've talked about which is about five percent of what I really know and more so they're getting like I'm sure folks Express regret I'm sure Tom Brady has regret running SPF this guy went from here to villain and to your credit I think you were the first to identify so I give you all the credit in the world look SBS is a fraud it's a multi-layer fraud that I have no doubt and it's it's through and through we're in full alignment around that and so what you're saying is Hey look it's a people at controls issue and that's again that's a good branch of the tree because willful violations of this law have serious consequences now if it is not a willful violation then it's a people controls issues so what Regulators can do is say

hey you've got to level up your management team they can mandate changes at the executive level and what I've seen are changes at the management level and changes the board level we don't know if that's voluntary from the board or both but we are seeing that so my my take Mark is this is that if there are people and control issues we should see a consent order we should see a curtailment activity but we're not going to see a some kind of catastrophic claim on the bank from The Regulators The Regulators need points of control that they can govern uh oversight and that today is silvergate because silvergate is the leading crypto to bank they don't want those transactions to go anywhere else what's going to happen I think that

if I'm going to write the final chapter the government is not going to want the transactions to go anywhere offshore so this stuff is going to be curtailed and ended the on and off ramps in my mind are going to get blown up just completely blown up from as people know them today and new laws are going to be put in where people are going to have to comply but the problem is it's not going to be the FDIC oig per se which shuts them down their their business will be curtailed significantly so the company will have zero earning power because if you're borrowing at CD rates I mean the the joke of the matter is silvergates deposits pay zero interest they don't

pay interest on their deposits so the fact that they're going to have to pay 450 on CDs to get liquidity the bank's never going to earn a dime again or very little right so I agree short term there's an earnings impact look again I was at Cross River and during PPP key we need liquidity to fund the working capital these loans we took out a CD at a very high rate then that CD rolled off and we started making a lot of money again so silvergate is taking the appropriate action which is to issue a CD which creates term funding for them I agree as a near-term impact earning however the present value the intrinsic value of a security is not based on next year's earning as you know it's based on the overall long duration of of cash flows but I think I think we're focusing

on the key elements it's around what's the regulatory response what's the probability and severity of the regulatory response yeah and and then what I think you're going to get Laura and the not too distant future I think Alan Lane the CEO is either going to resign or put on leave for an internal investigation to begin to figure out why these guys were so sleeping at the switch in who they were doing business with I think ROM and I agree these guys they weren't willfully involved they weren't willfully in on it per se but what's worse being willfully in on it or being sleeping at the switch if you're a bank I love this back and forth but I I

feel like we need to also discuss certain core issues that I just want to make sure we address and that the audience understands but before we do that why don't we take a quick word from the sponsors to make this show possible defy saver is an all-in-one management app for the top lending protocols on ethereum including Ave maker liquidy and compound they have dedicated protocol dashboards with options for quick leverage adjustment and self-liquidation as well as automated liquidation protection options with stop loss trailing stop and automated unwinding options they also have loan shifting tools for collateral and debt swaps and instantly moving positions between different protocols you can try defy saver today on ethereum arbitrum and

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industry-leading compliance Market intelligence and investigation support for all crypto assets for organizations like Gemini crypto.com and block fi gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting chainalysis.com Unchained back to my conversation with Mark and ROM so I did ask this earlier we didn't really address it but I'm curious you know for that core issue of FTX having transferred customer funds over to Alameda is that going to be something that The Regulators will view silvergate is having some responsibility for or or no 100 100 and they're going to go

through every single transaction and say what why did this happen and why did you let it go through but wait I have a question because because isn't at least I would imagine the vast majority of that money is crypto assets which silvergate wouldn't have visibility into except for the I mean the other part of it though is when Sam said that you know the ftfs didn't have a bank account for a while and during that period customers were sending funds straight to Alameda so maybe that's the issue USB those are USD transfers because silvergate bylaw cannot have crypto on its balance you can custody crypto and it does that through its Asian silver day but this is a matter of while this side can be very clear on what The Regulators will look at is this one did silvergate have an effective Bank secrecy act any money

laundering egbsaml program one do they have an effective policy procedure framework second did they apply it if they did those two things if it was effective and they applied it you still have Bad actors in the banking systems would any of that have any bearing on on that issue of the FTX customer funds being sent it does because if if you had a a transaction with Alameda let's say this is your point or FTX and FTX is a bad actor so long as the bsaml program was effective meaning it was robust it was stringent and they were carrying out what they said they're supposed to be doing then the severity if any of an enforcement should be liked if the program was

ineffective and they did not have oversight and they were not looking at traffic they were not engaged in probably in SARS if they were not looking at suspicious activity if they're not if they weren't tying out the standard estate information then then Mark has a point around potential enforcement actions and we don't know that to be honest we need to see evidence of that I've not seen any evidence of that I think I think to your point Laura the amount that was going from Alameda through FDX through silvergate back and forth the numbers are so large they are going to get scrutinized because the The Regulators were completely sleeping at the switch along with our lane I mean this is this is a a

sign of why the son-in-law was removed for the head of risk they realized they had a problem and they said let's get we have to make a change on November 7th it's all after you know the the horse is is out of the the barn but the problem for silvergate is it's not only FTX it's this bittrex and I and I've identified but have yet to come public with it at least three more so I think that that when you find you know one you can say bad luck two it's no longer bad luck or a coincidence three becomes a trend in more than three you have a major problem

and I'm here here to say these guys have a major a major problem major problem so one thing that I just want to understand is for the um the situation with the FTX and Alameda when FTX transferred the customer funds to Alameda that's against their terms of sorry ftx's own terms of service so that's kind of what that violation was so I just want to understand because like we're we're talking about the um AML and kyc program at silvergate but is that kind of situation where like the violation is against the terms of service with with the AML kyc processes have any relevance with that do you understand how in my mind I understand what you're saying I'll simply say if

there was no send Network if there was no send Network there would be no FTX or Alameda they wouldn't exist okay the the crimes that Alameda and FTX would not have existed had silvergate not been in this business so the problem is going to be if you're a depositor to FTX right and your money is gone as part of all the lawsuits silvergate is going to be a defendant as sure as I'm sitting here because Silver Gate silvergate was and were and are the pipes where this stuff goes through it's not going to be

a term of service thing your money is gone your your money is gone it's stolen it's gone you'll never get it back or you may get cents on the dollar back okay but but in in things like this the lawyers or your class action lawyer and other lawyers are going to go after everyone where that money could have gone through touched or appeared I mean look at all the Madoff stuff I mean JP Morgan I think paid two and a half billion dollars in the Madoff thing and they didn't even touch the money okay so I just want to break it out for for the audience because so as we identified there's at least some portion

of that money that's going to be crypto assets that um silvergate probably didn't have any visibility into because that was just you know um FTX and Alameda sending that you know on on blockchain networks and I don't remember if we described what sen is for people but I'll just quickly do that for to make sure the whole the audience fully understands it's the silvergate exchange Network and that gave clients the ability to move dollars between each other pretty much instantaneously to settle the Fiat side of any of their crypto transactions basically immediately which obviously for anybody who's navigated that difference between like Bank time and crypto time Big Time often can be you know like days or whatever versus crypto time which is seconds or minutes so

obviously that's you know a huge advantage that Network also enabled customers to deposit money from a bank onto a crypto exchange as long as both the customer and the exchange they linked with silvergate and to to move that money immediately so so Mark just to understand when you say that um FTX and Alameda would not have been able to do this without sen that's for the Fiat portion of you know whatever funds that moved so are you talking about how Sam bankman freed said that initially customers were wiring or FTX customers were wiring money directly to Alameda is that where they're culpable SBF has said and I've put it on my Twitter and I can send a copy to you he

said prior to the Silver Gate Network this couldn't have happened you know there was no banks wouldn't touch them Banks would not touch them as it was that's why they had to call it Alameda research and they said before silvergate existed these crypto exchanges couldn't have couldn't have happened I mean just just flat out and and Alan Lane foolishly used SPF as a sponsor and foolishly he uses this Rex guy crying it's not a crime so yeah it's foolish I'm sure they have hindsight 2020 but I'm I'm trying to focus on claims to stockholder Equity it's yeah I'm sure they regret that but we should move off the whole getting to that

spokesperson quiet I don't think it I don't think it advances the conversation well it's it's it's it's gonna it's gonna turn out to be a big deal as it relates to those suspicious reports they talk that you talked about because I don't think you're filing suspicious reports against someone's entity and still going to have that person as a spokesman and if they didn't file suspicious reports on Alameda or FTX or bittrex or these other criminals who they do business I mean they do business silvergate make no mistake and I think you'll admit this criminals use the send Network do do you disagree with that I I believe criminals will seek to utilize crypto exchanges to attempt to launder

that's not that's not what I'm saying I think I think I think it's I don't think it's relevant Mark I think the question is do they have an effective bsaml program was it applied or not that's what the regulars is that's on the regulatory standpoint and I think they'll be guilty of that but on the court of law standpoint Court of public opinion standpoint if you were someone who lost money in FTX or Alameda and you're covered in these multi time multi-multi-billion Dollar suits I know at your core you you realize the heat that's going to come at silvergate so the two two points that Mark is Raising here which are which are novel haven't introduced yet one is hey lawsuits so

the case of JPMorgan you raise it's a great point you say look they got a 1.7 billion dollar fine on January 17 2014 because despite their asset manager saying that Madoff wasn't suitable for investment they suspected fraud they enable funding to take place so that's Mark's uh one of his observations I'm saying it's not relevant here's why JP Morgan is an asset manager they have a duty of care they were acting a very different capacity than silvergate which is providing money transmission service between institutions uh where their system that controls related to kyc and AML so it's a different frame with enough fiduciaries further in order to file a claim of suit against silvergate you got to have standing if you're a

client of FTX and you lost money yes you can file a frivolous lawsuit against silvergate but there's no standing or legal basis for that claim to go anywhere in fact I've studied the two class actions out there that were issued they don't have a plaintiff yet and the complaint sites this Twitter thread from an anonymous person and an allegation which isn't evidenced and it's a house of cards built on this one Twitter thread including the Elizabeth Warren letter which references that I'm sure we'll come back to that but there's no evidence nor standing for plaintiff to see remedy from silvergate but okay so I want to ask about this because um and I'm not I'm not sure that this is the class section lawsuit that you're referencing but I'm just going to quote

the the portion uh that I think is interesting so this complaint alleges that silvergate was complicit in and responsible for some of these fraudulent losses through the bank's violation kyc and AML obligations and knowingly or negligently permitted FTX to Direct Customer deposits to Alameda research which you know is this hedge fund that is not supposed to be related to FTX so I was wondering is it silvergate's responsibility to have recognized that those transactions shouldn't have happened that FTX customers should not have been wiring money into Alameda because it seems you know somebody uh whether at FTX or Alameda or somewhere

should have recognized this should not be happening but could it be someone silvergate that should have recognized that it's a different question I'll just again I'm going for the regulatory perspective and the law perspective again as an operator I had to know the law right so the regulator will say silvergate did you apply your BSA ml program did you monitor for perspectivity if you saw activity did you report it and did you investigate further the regulator will ask did silvergate have a reasonable basis in enabling those transactions if they had a reasonable basis and they complied and they did whatever investigations they did they did then silvergate has low risk if however so silvergate did not apply the procedures that's negligence

or if they saw something suspicious and they didn't report it that's an issue so that's really where this debate turns on and I haven't seen evidence of negligence what I've seen is evidence that they're good standing and that's why the regulars let them grow their business that's why they're able to acquire the DM stable coin you know this is all prior to 9 30. I mean 9 30 doesn't matter I I like your 9 30. I'll and look I agree The Regulators are examining let me just want one other kind of story to make this very clear the FDIC examination teams they have the rights to inspect all sorts of data look at anything they want any policy procedure

email corresponding it's not easy even a bank they were scrutinized well before 9 30 is my point they were of course on-site or virtually on teams looking at data and Michael sue the acting control of the currency which is the most senior official the bank Regulators again he issued a requirement requiring non-objection from from the primary regularly so what I'm saying Mark is I agree you're upon 9 30. can't wait to your end and we are speculating here yeah but the regulars are already all over this because they already have a heightened sensitivity to the risk of illicit activity on cryptocurrency transactions they're they're focusing on BSA ml they're looking at those transaction documents they're looking at

the back and forth the client they're looking at this tip program and the and the raw data even before 9 30 at a granular level but wait and Ron why is it that you said that um they wouldn't The Regulators wouldn't deem you know silvergate allowing FTX customers to wire Alameda funds to Alameda as privileges why they're not regulated as an asset management asset managers fiduciary they have a duty of care to LPS and JPMorgan said we think this is a fraud apparently this is my understanding of the story and yet they let a wire go into an actor that they perceived as fraudulent silvergates regulated as a bank it has to comply with of course law and the relevant laws are what we've described

the BSA AML program reporting of suspicious activity money transmission law they're not a fiduciary TLP so a16z cannot Sue silvergate or outstanding because they lost money in FTX because FTX was a fraud that would be the JPMorgan analogy if GP Morgan said FTX is a fraud and GP Morgan processed the wire for a16c You could argue that standing but the silvergate's not an asset manager they don't have that duty of care as it relates to Investment Management Laura if it turns out that silvergate was negligent in any of the things ROM talked about you know it's essentially over for the bank because that opens the doors for all the lawsuits because suspicious

activity reports weren't filed and they didn't do anything to stop it and he was well aware of the SBF promote of saying how easy it was to do business with silvergate and no one else no one else other than silver gay would have banked them how do they weren't filed how do you know they weren't five Mark they're confidential and private the SARS because if they were filed right if I was filing suspicious activity reports on you I'm not a Harvard or a Yale guy or anything like that you said you would take the name off the site for sure now the other part is again we don't the fact that fkx is a fraud which I'm in complete agreement with you that guy got to go to jail okay no it's not only a fraud it's a criminal

operation and the quest and the question is the the real question where I think it's going to turn is what role did and Freeburg have in all of this along with SDF right I'd love to get there too Mark and you know I'll say this like the fraud at FTX among others self-dealing all the rest was misuse of customer funds but that activity takes outside silvergate and the set network it takes place at FTF FTX and Alameda meaning the mere fact that FTX is a fraud is not indicative that there would be transactional data in criminals use this 10 Network to trans to transfer up to a trillion dollars a trillion dollars

they facilitate the movement of stable accounts it does it it will not matter at all we're not talking about JP Morgan and we're not talking about it too big to fail Bank we're talking about a bail a bank run by an absolute clown Alan Lane is a clown he is he is fast at best is a c minus manager who is foolish enough foolish enough when he's on the Cartoon Network to put religious Motif in the background and have his son I mean come on Rob would you have your son-in-law as the head of risk of any institution you would run I I'm I'm not a I'm not under

public scrutiny but I will say answer answer the question I'll answer the question mark I'll answer the question I'll say look the vast majority of small Community Banks which is how silver get started as Community Bank San Diego you know the primary predictor of whether Bank gets acquired is if the CEO retires because usually they hand it to their son their family intergenerational businesses but you're right it was a sleepy bank that grew up it benefited from the tremendous growth in crypto I acknowledge that that was a driver of their growth and the only thing I'll say Laura is when you're a financial institution like silvergate a sleepy this is where we all agree right a sleepy bank with 40 million in in

deposits and you grow to 15 billion in a couple of years you tend to lose control if you're on top of it if you're not on top of it and your systems aren't up to speed and your largest customer is a criminal in a criminal organization and I can find others like it which I haven't even come with yet it's going to be a major problems they've upgraded management and the son-in-laws know the work in that capacity so I'm just acknowledging their remedying issues around people and control the stuff okay but so I want to um just have you kind of each play out your scenarios here

because we have the letter from Senator Elizabeth Warren and two other Senators John Kennedy and Roger Marshall to silvergate saying 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 you know I don't know where that query could go but you know I was wondering Mark like you know what do you think are the regulatory actions that might be on the horizon and how would that affect the bank because you know I mean I'm not some expert on traditional uh the traditional Financial world but I've seen so many banks get like big fines and then they just keep operating so you

know are you saying that you think silvergate will go under or will it have to Pivot out of crypto the way it looks like signature might be doing or what's your vision of where you think things will end up well they they have to answer Senator Warren's questions by I think December 19th so that's going to be very interesting what they come up with I think their business their business right now is an absolute free fall and they still have other customers who who are under significant stress who may go bankrupt or or fail and and I'm not a crypto guy I've never been a crypto guy I've always said I'm not a crypto guy and we've yet to see the bottom of any of this stuff so who knows where their business is

going to bottom out but as it stands right now they're not making any money they're probably losing money giving what their funding has done and their new cost of funding so they have to answer Warren I think other Regulators are going to start kicking things around and I think things are going to end very very badly because as more truth comes out to what went on these guys you know Ron's a good guy he's a solid guy and he's admitting they had to make changes and did make changes but when you make changes that at the senior levels like head of risk that's a sign that there was a major problem that's sort of an admission that there was an issue now so

much money went through their Network and their wires this is a company that that is only capped it's 700 million dollars this is not a too big to fail Bank this Bank could go under which I think it will I think the bank will fail or will get seized and when it happens this is again this is not JP Morgan or Bank of America or city or Wells which is too big to fail that then the rules of the road will change and it won't be able to won't be so simple to move a trillion dollars 24 7 365. it'll be regulated on who can move the money through that Network and

it's going to be a trust but verify and I think the trust was there but the verify was never there they never realized that all this money moving from Alameda through FTX through send through other guys was was untoward the last bit was you know we mentioned this class section lawsuit which ROM said he felt that plaintiffs had no standing do you think there's Merit in it and if so where do you think that might go that that that's not the class action lawsuit that's going to get them the lawsuit set's going to get them is they're going to be named and everyone who lost a dime at FTX they're going to be a defendant in that whether they can get themselves thrown out of that we'll see but if they

were negligent in any of those those tests that ROM talked about act rightly talked about the the bank will close because negligence negligence is not okay you know being in on it is not okay but being negligent is not okay and there and there are former employees who've reached out to me through my DMs and other means where the the picture they paint is so bad it's so bad it's downright scary and I forwarded those those things off to of The Regulators who I'm in who I'm in close contact with and and I just give them everything I gotta respond to the Warren question and

then whether Regulators will allow this bank to fail or not and the negligence point so yeah yeah I was going to ask you how you think things will play out let me go through that so first off that Warren letter simply restates the allegations from an anonymous tweet thread and it doesn't actually add any information it says silica appears to be at the center of improper transfers well of course or leaving crypto bank is that it could constitute violations of law these are just restating known law and and known facts I'll also say Elizabeth Warren on that day published three other letters she's written more letters this month and there are business days in December she wrote a letter against Wells Fargo last month I spoke to a short seller who said they had a hand in writing the letter so this

looks to me like an organized bear raid and what Elizabeth Warren's letter did is it added the veneer of legitimacy by wrapping fur good name around this Anonymous tweet thread that has these highlighted documents and uh drawings that are look nefarious so there's again there's no evidence there are allegations now let me talk to bank failing Regulators view it as a failure on that part if a bank fails on their watch why is that because The Regulators need to preserve the Public's perception of the safety and sadness of the banking system they will go through Great Lengths to take steps to avoid a bank

failure including a letter that's sent in advance corrective actions memorandums understanding consent orders and if they truly feel that there's a risk then they'll invite other Banks to auction off assets and liabilities and silvergates assets exceed the liabilities even if you take in Mark's worst case write down so the depositors are not at risk here and The Regulators again we agree it seems like as of 9 30 celebrityget was in good standing you don't go from good standing until we're going to take your bank out in in a few months there's a remediation process there's a cure process lastly on negligence so we're talking about the severity of negligence and where there is negligence or not I have not seen

evidence of that Mark is alleging he's seen evidence of that look uh there are other Trust Banks in the crypto ecosystem that have received consent orders okay the Anchorage received a consent order and just to find consent order so a consent order is a corrective action from the regulator which must be obeyed by the bank on pain of further penalties which could include management expulsion and loss of the charter they're serious and so in the other consent order what was required is that customers are re-kyc'd they hire a new BSA AML leader and their curtailments on growth that

was the consequence of uh some deficiency in the bsaml program and under the administrative procedures act law The Regulators are required to treat like circumstances in like manners so supposing there's a deficiency in base AMF which I haven't seen evidence then what we should expect is something like a consent order with a similar treatment and consequence for silver day okay so you guys have both laid out great arguments like you know I'm not in a position uh to pass judgment but I I sort of feel like you know both of you have strong arguments but I'm very curious for both of you what new

information would you have to learn to change your position on silvergate yeah like what if you found out something what would make you change your mind Martin's gonna stay committed to this position but you want to go ahead no he may not he looks like he's thinking and and by the way Ron I meant to ask you because Mark disclosed earlier that he's short silvergate are you do you have are you good question I did put a long position on last week we don't have a view at limited yet although we have a crack keep of analysts working this my wife will agree with Mark that my head's probably on backwards although she says that every other day of the week so okay well people it's good for people to know you both have a vested interest in your arguments yeah I mean I'm not short of

opinions I mean I would I would assorted CX if I could have but you know I couldn't have so I still spoke out to try to help people out and I think I've helped a lot of people out so that's good I don't know for me to change my mind on silvergate I'd need time I need time to see things play out to see they aren't as nefarious as I think need to see more evidence but the problem is is people are talking and there was an ft article out and and former employees talked to the Ft person and they're talking to me and and the procedures and how they go about doing business and and you know there were limits to what people could move on the send network but when things

got volatile they could go and complain they need to move more and they weren't supposed to and they up people's limits I mean the bank is just completely an utterly out of control whether or not it rises to the level of the government seizing it we'll see but at a minimum I mean and I think I I'm curious on ROM's take these guys aren't going to earn any money so so they're gonna start losing money probably in a big way shortly and from an earnings standpoint the Stock's way overvalued from an equity standpoint the book value is not 35. it's somewhere close to 20 and that's not going to matter and I think they have huge problems I think Alan Lane is as good as

gone on leave I think they're going to have to have an internal investigation and a lot of times with these things what you need is time and I'm in I'm in no hurry to cover none whatsoever I did more last week I shorted more because I think this thing is is very very sick so if we pick this up three months from now I think there'll be more information and I'll either say I feel better about my position or I feel worse and I'm gone and you know I'm an active Tweeter I tweet about this thing all the time and and and something else ROM that that should bother you greatly is whenever companies in my history blame short

sellers or social media for their problems it's a very very negative sign a very very bad I generally agree with that statement by the way yeah and and the fact that they put it in an 8K in an SEC document means they're going to have to be held to that and and and that it's just the Optics here are very very bad Ron uh you know I want you to answer what what information would make you change your mind yeah sure evidence evidence what changed my mind hard data and I'm looking forward to a few catalysts I'm looking forward to intro company reporting in short quarter reporting I'm looking to quarter end financials I'm looking for additional AK I see the short interest is at 40 now the stock hasn't moved down from the

ship from sword interest going from 20 to 40 percent so every short has to cover at some point it's future demand uh on that side of thing so that that's what I would look for I agree with Mark that short-term earnings will be challenged for the funding higher that's not the main driver of valuation banks in general are valued at a price to book ratio that oscillates around the one it's higher if you grow more quickly it's lower if you have a lower business the price the book ratio is around 0.5 even if you accept Mark's argument around the write down which I haven't seen evidence for uh on that basis you could say silvergate is still fairly valued and growing at an above average industry growth rate if that write down isn't there mark please send that to me

I would love to study it clinically I'll DM me your email I'll send it to you but um they're they're not they're not growing ROM they're they're going to be declining huge in in 23. huge the numbers the numbers are coming way down right one last point on the uh and you're at the crypto sector is going to grow slower so I'm not surprised to see lower growth I just think that they have a competitive Advantage because The Regulators are not going to allow other Banks to get in their business so they're not many ports of call for crypto firm with your depositors we saw Falcon X leave the program and then come back to the program within a week silvergate uses apis to enable exchanges to move money and they have hooks into

these businesses so I think it's sticky I don't think coinbase or other leading exchanges are going to move away from them they're a long Silver Gate doesn't mean they have to be long to stock they're long the business model they silvergates indispensable to the function of the crypto exchanges which appears to be I think we're in agreement around that just but lastly in the short Point look Shorts play a valuable role in pulling up for like Muddy Waters in China and carousdale and shorts over the last I guess 10 years or so and Mark you know this better than me you know you're a legend have evolved from I identifying malfeasance to really doing more event-driven short selling meaning there's like a campaign there's a class action here's a tweet there's an

aggressive marketing and that's what I see here I see a tweet with no evidence number one I see Warren alyssenator Warren wrapping her esteemed reputation around this tweet I see two class action lawsuits that don't have a plaintiff a standing or a basis and I see remedial action from silvergate they're taking efforts they issued a CD that's what they're supposed to do they're improving and upgrading the board and management and they are issuing disclosures intra quarter where they can in a manner that you know has to comply with login they can't talk about suspicious activity that itself could violate the law if price the book for silvergate goes back to one or 1.2 in a two to three year time frame which is my Outlook then

you've got like a 2X here but I agree look that the next year you know we gotta wait for more data and I go back to your opponent on JPMorgan Mark so again in January 17th of 2014 when they got a 1.7 billion dollar fine for the Madoff of enabling that wire transfer which again it's not a relevant case here their stock essentially went flat for the next nine months it wrapped up the year up 10 if you have bought JP Morgan on January 14th held it to today that's eight years later you'd be up 290 that's a three extra term that's a venture capital outcome I'm not saying that's not really going to happen here all I'm saying is dislocations create opportunity to study Focus dial in analyze assess the assets and the

liabilities of solvency liquidity Capital requirement competitive advantage and develop a point of view and I I enjoy the back and forth here Mark around this yeah that's also all's good I'll just say Alan Lane is not Jamie Diamond Alan Lane is a clown you you hold it to an impossible stair somebody gets a sub 1 billion dollar Community Bank but but I'm just paying a Silver Gate disappears tomorrow no one will miss them no one no one will miss you all right well this is I think a great place to end it there's you know just a lot of good points on both sides I mean Super fascinating discussion and I think it's one that um a lot of at least crypto business owners will be

interested in because I think a lot of them probably bank with silvergate and um a lot of you know exchange customers uh will be affected if anything happens to them so we're gonna have to see what happens obviously there's gonna be a lot of eyes on what they say December 19th Etc but um I just loved having both your insights so before we wrap why don't each of you tell people where they can learn more about you and your work well first of all I thought I think ROM's a good guy I can we can agree to disagree but I enjoyed this thoroughly and I want to thank you for having me Laura I'm just I'm essentially I'm a Twitter guy I'm at Alder Lane eggs I'm prolific on Twitter and that's where you can follow

me or find out how I'm thinking and I'm not afraid of much so like just kind of speak from the speak from the mind and the heart and I appreciate having been it was nice getting to know you around likewise Mark and again thank you for the kind words I I think you again you're you're credible and I appreciate the back and forth we agree to disagree on this point here first off anything I've said here is not Financial advice it's not officially limited position you should talk to your advisor and by the way if you do want to get along the stock there are better opportunities such as selling in the money put because the implied volatility is so high that you can reduce your cost basis or perhaps going along the preferred stock which is seeing the capital structure you got 12 to 13 yield so there are

different opportunities feel free to reach out to lumada lumada.com where you can find me on Twitter at ramalalia just briefly closing argument sen is critical Market infrastructure coinbase the other exchanges need them they have benefited from a network effect they have a dominant leading position in the sector they're not easy to replace they have Integrations through apis they're one of the only games in town switching costs are very high Mark's main point is that there are these liabilities that are unknown on Iran enforcement and class actions we disagree on the probability and severity of those actions as well as this kind of balancing impact which I will study more closely and we'll

thought with Mark around that so yeah they have ample Capital they've got ample liquidity they're improving board they're improving management they're funding through CDs I think the bull cases that creates a near-term dislocation opportunity silvergates traded down in lockstep with coinbase fundamentally different business models coinbase is pro cyclical they make money on transaction fees silvergate has recurring Revenue eight to nine million dollars in fee income plus they generate net interest income with zero credit losses on the crypto book and the U.S credit risk from this from the US government so I'll wrap up there yeah I think I mean we we've we've gone through just so many arguments on both sides I mean they're both of you just make such

good points so you know I think we're gonna have to see how things play out from here on out but you know I'm glad the audience now kind of understands the issues and I have a feeling you know many listeners were not aware just how crucial silvergate was to the crypto industry so you know it's important to to see what happens there um but thank you both again it has been such a pleasure having you both on Unchained thanks so much for joining us today to learn more about silvergate Mark and ROM check out the show notes for this episode Unchained is produced by me Laura Shin with out from Anthony Yoon Mark Murdock Matt pilchard wandervanovich Sam sriram pamajimdar Shashank and CLK transcription thanks for listening foreign