U.S. lawmakers press federal banking regulators on industry’s exposure after FTX collapse

Top Senate Democrats pressed key banking regulators on possible ties between the industry and digital currency exchanges following the bankruptcy of major cryptocurrency firm, FTX.

Sens. Elizabeth Warren, D-Mass., and Tina Smith, D-Minn., members of the Senate Banking, House and Urban Affairs Committee, sent letters Wednesday to the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency asking concerning the close ties between crypto markets and traditional banking following the collapse of crypto exchange FTX.

The letters are the newest in a series of inquiries to varied financial institutions and regulators about cryptocurrency oversight.

“It appears crypto firms can have closer ties to the banking system than previously understood,” the senators wrote to Federal Reserve Chair Jerome Powell, Martin Gruenberg, acting chair of the FDIC and Michael Hsu, acting comptroller of the OCC. “Banks’ relationships with crypto firms raise questions on the security and soundness of our banking system and highlight potential loopholes that crypto firms may try to take advantage of to achieve further access.” 

The letter referenced reporting from The Latest York Times that exposed former FTX CEO Sam Bankman-Fried’s sister company Alameda Research invested $11.5 million in Washington state-based Moonstone Bank. The quantity was greater than double the bank’s price on the time, based on the report.

The pinnacle of Moonstone’s parent company FBH Corp also chairs Bahamas-based Deltec Bank, which offers banking services to FTX trading partner and stablecoin issuer Tether, based on the letter.

Silvergate Capital Corp., Provident Bancorp Inc., Metropolitan Industrial Bank, Signature Bank, Customers Bancorp Inc. are amongst several noted banks experiencing heightened volatility after the FTX failure. Crypto deposits made up 90% of Silvergate’s overall deposit base. The bank’s average quarter-to-date deposits fell to $9.8 billion from an overall deposit base of $11.9 billion, the letter states.

Crypto loans comprised over half the equity capital for Provident bank, which is experiencing potential losses as high as $27.5 million, the senators wrote.

“Banks’ relationships with crypto firms raise questions on the security and soundness of our banking system and highlight potential loopholes that crypto firms may try to take advantage of to achieve further access to banks,” the senators wrote.

Warren and Smith acknowledged that the banking system has remained relatively unscathed by the FTX failure, but the corporate’s entanglement with small banks exposes potential loopholes that crypto firms could use to achieve further access to traditional financial institutions.

FTX’s investment in Moonstone could possibly be interpreted as a strategy to bypass banking licenses within the U.S., based on a Nov. 25 CoinTelegraph article cited within the letter.

To higher understand the banking industry’s exposure to crypto, the senators asked for responses to a roster of questions, including all business relationships between FTX, Alameda and Moonstone, by Dec. 21.