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

Episode Date: December 13, 2022

Ram Ahluwalia, CEO and cofounder of crypto-native investment advisor Lumida, and Marc Cohodes, individual investor and former hedge fund manager, have a heated debate about Silvergate, a crypto-friendly bank that plays a key role in integrating crypto with traditional finance and is currently under scrutiny due to its ties with FTX and Alameda. Both Marc and Ram have a vested interest in Silvergate. Marc is shorting the stock, while Ram is longing it.   Show highlights: why Silvergate plays such a vital role in the movement of money within the crypto industry whether Silvergate runs proper KYC and AML practices whether Silvergate has a $1 billion hole in its balance sheet whether regulators will go after Silvergate as they are doing with FTX why Marc thinks the FTX collapse wouldn't have happened without Silvergate  whether Silvergate was complicit with FTX’s activities or simply negligent  why Ram believes this case is different from JPMorgan's involvement with Madoff  what regulatory actions might come in the near future for Silvergate  why Ram thinks regulators will go to "great lengths" to avoid a bank failure what would it take for Ram and Marc to change their minds   Take Unchained's 2022 survey!   Unchained is doing its annual survey. 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!  Thank you to our sponsors! Crypto.com Chainalysis Minima DeFi Saver  Guests: Ram: Twitter Ram’s thread on Silvergate Ram’s previous appearances on Unchained: Genesis May Be Facing Bankruptcy. Could It Take DCG Down With It? Why Genesis Could Very Well Be Insolvent, Not Just Illiquid Marc: Twitter   Episode links: Class action lawsuit against Silvergate The Block: Silvergate CEO seeks to reassure investors over crypto contagion Letter from Senators Elizabeth Warren, John Kennedy, and Roger Marshall The Guardian: JP Morgan Chase to pay more than $2bn in penalties for Madoff ties The Financial Times: Silvergate: from tiny local lender to bank behind the crypto boom WSJ: Crypto Is Taking a Few Small Banks on a Wild Ride Bloomberg:  These Banks Were Left Holding the Bag in Crypto Implosion An Obscure Bank Found Its Key to Success. Then FTX Collapsed CoinDesk: Crypto Bank Silvergate Says Its BlockFi Digital-Asset Deposit Exposure Totals Less Than $20M New York Post: Crypto ‘smart’ money? Big traders fell for Sam Bankman-Fried NBC: Sen. Warren demands answers from Silvergate Bank about its business dealings with FTX Dylan LeClair’s Twitter thread Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, 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 Cohodes and Cryptobanking Insider Ram Al-Alawalia on why, 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 slash R slash 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 slash R slash Unchained 2022. And you can also check the show notes for the link. 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, 2020 episode of Unchained. Are you getting more questions than ever from your crypto-curious or skeptical friends? Send them my crypto-explainter on TED at go.com slash laura shin. Defy Saver is an all-in-one management app with unique automation options for top lending protocols such as Ave, Maker, Liquity, and Compound. Check them out on Ethereum Mainnet Arbitur, and optimism.

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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 Cohodes, individual investor and former hedge fund manager, and Rom Alawalia, CEO and co-founder at Lumida. 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 of the bank quintupled from $2 billion to $10 billion. Its stock price also skyrocketed from $12 to $200 a share, but now it's trading at about $20 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. 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 Googlable guy. I've exposed significant frauds going back from the 80s till as recently as I think 2018, which is something called my medics, where the CEO and COO went to jail. And you were calling out FTX back in, what was it, September and October? Yeah, I'm just getting, I'll get to FTX in a minute. You asked for my background, but there have been some Harvard Business School cases written about me about exposing subprime mortgage fraud and in 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 publicly went after them with a hatchet and axe, but was largely ignored. The mainstream media here did a horrifically bad job in following through. So that's sort of a little bit about me, and I have a very strong and negative point of view on Silvergate as it relates to their practices and how they go about doing their business.

So that's just a little bit about me. I tend to be vocal and I don't sort of give up till things have sort of cleared themselves through. So I'm just not one of these people who say something and just drop it and move on. Which is great. Rahm, what about you? Thank you, Laura. First off, Mark, please to meet you. I've tracked your research going back to Nova Star.

And, of course, you've made a killing this year in Carvana. In a former life 10 years ago, I was an investor in Carersdale. I'm sure you know who they are. And I'm friendly with folks at Hindenburg. 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 ever extended. We'll get into that.

But I appreciate the points and the contributions you've made, especially in calling 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 Merrill Lynch. I was at Merrill Lynch during the 2008 financial crisis, literally lived down Wall Street. I saw the limos pull up and maiden lane and take a limit under that weekend. So it's very up close for me. I was also shorting Fannie Mae and Freddie Mac due to solvency issues.

So I'm sympathetic to some of the arguments that one can make around solvency. 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 Lumida, which is a digital asset advisory firm. And my colleagues come from Goldman Sachs, Mara Lynch, and also include a bank regulatory attorney who is a CEO of a trust bank. In terms of regulation, I've done teachings at the U.S. Securities and Exchange Commission. I co-wrote 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 Pure IQ. They issued a press release there. So I hope I'm Googled, but 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 he indicated. And Rom, you're, 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, Silvergate sort of stuck out to me because the guy who runs at Allen 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 until 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 is. So, you know, once you can call it an accident to, you know, you're sort of guilty of,

in my mind, sleeping at the switch. And when called out about BitTRAX, 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. The people there don't know their ass from first base. They got in huge trouble with FTCs. Their trouble has just begun.

they're going to have issues with Bitrecks. They've had issues with other exchanges which they're not disclosing. And I think the regulators have been woefully behind 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 woefully deficient in KY. and AML practices, and their book value is vastly overstated. They have probably $500 million of

assets that they admit are 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 Silvergate's 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 real guys are going to come in and do this business rather than them. I think SBNY said last week they want to sort of get out of the business or cut a way back. And they know what they're doing. I mean, their controls are superior to silver gates. 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 least from now till six months from now to where the smoke clears or the bank has issues. So we'll see. And Rom, I know that you have a different position. What's your view? Sure. Well, 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 just framing up Silver Gate and then I'll cycle through how a regulator would look at Silver Gate in terms of capital, asset quality, management, earning, liquidity, sensitive to sensitive 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 Silvergate can enable book transfers 24-7. And Silvergate 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 owing to the nature of their business model on the platform. It's important to say a few clarity, few points of clarity here. One is Silvergate does not hold any crypto on its balance sheet. And that's, first of all, that's illegal. Silvergate cannot hold any crypto on its balance sheet. Silvergate holds deposit. and their deposits are concentrated around these crypto companies. Also, the loans Silvergate has to crypto firms are over collateralized, 2.5x, and that SEN leverage program has experienced 0% 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 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 government-backed, mortgage-backed securities, treasuries, cash. And they also have a divers-fied funding base, although it's true that's come under pressure in recent months. On the credit assessment, Silver-A-Gate's assets, again, they're high credit quality, they're mostly liquid, and they have very low duration risk due to the floating rate nature or Silvergate's usage. of derivatives. Silvergate has about 15.5 billion in assets. And again, crypto lending exposure is less than 2%, and that's already over collateralized.

Zooming into the asset side of the balance sheet, they have almost $2 billion in cash as of September 30th. They have $1.3 billion in US Treasuries. They've got $6.5 billion in US agency sponsored debt. They also have $3 billion 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 pay. On the liquidity side, we've done a stress test analysis.

Crypto deposits would have to 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 the Federal Reserve. Also, they can sell those liquid marketable securities we talked about into the open market and not infer an impairment. Finally, they can issue certificates of a positive, which they've done in recent weeks to address any issues around customers with drying.

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 in the category. Of course, we'd expect those earnings to come down and growth rate to slow as their funding costs improve. But they have a significant amount of fee income. They have net interest income, and that net interest income is on good creditor. 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'm 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 the 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 you saying that when you're looking at the or when you have concerns about it, it's KYC-A-M-L, are you saying that somehow deficiencies in the KYC-A-M-L process at Silvergate either allowed that or like somehow enabled the transfer of those funds or are those unrelated? Okay, that's a good question.

First, I want to just take a few things that Rom said. I mean, when Rom says as of 9.30, you know, that's like saying the Titanic was a great ship till it sank. 930 doesn't mean Jack Ships. here because there was a catastrophic event in early November. And the business, Silvergate's business, has absolutely imploded since 930, so 930 doesn't matter. And when Rahm says asset quality, Silvergate has a $1 billion impairment, some of which they've yet to run through the balance sheet, holding these mortgages, governments, and things like that. They're $1 billion in the whole. 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 anyone thought of Silvergate as of 930. Right now, we're at 12.11. 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, is completely out of control and is an absolute shit 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 network that runs 24-7, 365, off an asset base that is well below probably $7 billion as I speak. So that is before we'll address this Alameda thing. Quick responses. Laura, just want to address a few things. So one, and of course Mark knows this.

Silvergate does have a $500 million recognition of losses against certain assets on the balance sheet. Mark is saying that there's another $5 million to go. I'd love to see the documentation of evidence of that. We could flop on that later. I don't want to derail the interview, but that's one. They also have $1.3 billion in stockholder equity, of course. they are well capitalized and meet their current regulatory reporting requirements. The intra-quarter updates is what Marks referring to us press release.

It's 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 I'll say on this is that Silvergate is handicapped. For example, it's illegal for a bank to report on suspicious activity of one of their clients. that's called a SAR or Suspicious Activity Report. You're not even going to disclose to the client that you filed a suspicious activity report.

You're shared with the regulator. So there are some constraints around what the Brigade 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 if, in fact, they were filing suspicious claim reports on Alameda or FDX, why would they have SBF as their spokesman? I mean, it makes no sense. And it's the same thing with these bitchwrecks clowns.

They're using them as spokesmen, till they're called out for doing illegal things, and then they pull them down. And this is short sellers calling them out, not regular souls like yourself. 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 are destined to fail. Destined to fail.

And if you look at the balance sheet, and I can't, you know, I'm not at a computer. Otherwise, I call it up. Look for securities held to maturity and securities 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 PNL or the balance sheet. And when you do that, book value goes from 1.3 to about $800 million.

So everyone thinking that it's cheap based on book value, and you should know better, ROM, book value for banks don't matter. because Nova Star when the stock was three folks wrote off $77 a share in book value. 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 don't worry about book value of a distress situation. And for a bank, which was a sleepy,

bank doing $40 million 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. Ron, 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. I'm going to focus, clearly they're investing in their board and they're improving the management. They have a new risk person and a CRO. But, Ron, the horse has left the barn. The new wrist person is as of November 7th, right? As of November 7th.

They have Elizabeth Warren up their ass. They have a bipartisan 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 five attacks here. around and so great. And I'm happy to address them all in turn. But let's add some structuring discipline. Yeah, let's be a little more structured. Because one thing that I did want to ask about

earlier when we were talking about their K-Y-C-A-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 of 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. But the compliance team at the exchange, you know, in terms of FTX and Alameda, we're completely crooked. I mean, if anyone doesn't think that that's a criminal operation at

FTX, something's terribly wrong with you. So FTX had no compliance. Alameda had no compliance. The chief regulatory officer at FTX was 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 they commingled customer deposits as well. So at a minimum, when forensically everything gets unwound,

someone is going to have their head so far up Silvergate's ass, they're not going to be able to see. And every transaction will be scrutinized. Every transfer at the end of the day is going to get scrutinized here. So obviously, I mean, there's like five million investigations of FTC's in 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. When we first is the KYC program, and then 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 U.S. Patriot Act and Bank Secrecy Act. So there's initial and then ongoing. Initial mean that there's a K.C and AML program, also known as a SIP program, a customer identification program. And they'll have a various sets of activities, including negative news screening, and they will subject their clients to what's called enhanced due diligence, particularly because in the crypto sector. They will take extra effort. 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 activity. 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 a change in behavior, then they further policy and procedures should issue a suspicious activity report certainly notify their compliance team. That's 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 in good standing. Here's why. First off, they bought DM, 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 felt Silvergate's

equity was at risk or that that business activity would be untoward in some way. Second, Silvigate has no public consent order and they're permitted to grow their business. They've not been directed to curtail the activity. Lastly, in the regulators, the FDIC has issued a non-objection required. Meaning, if you're a bank that you want to be active in crypto, you have to seek non-objection for the regulator. Sliwigate is active 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 on his transactions. Your points are good, but the problem is there as of or before 930 in the Titanic sank in November that the regulators nor no one saw coming. That's the problem. The problem is the analysis of this company is through the front window, the front windshield rather than the rearview mirror.

And everything you talk about is rear view looking. Yeah, in the past, prior to 930, they were in accordance. I cannot wait to see what they're going to report come 1231. I can't wait to see what those 1231 are. And everyone is going to be beyond surprised of the regulatory scrutiny that's going to come down on these guys. That I can promise you. Mark, can I ask you a question? 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.

When the final chapter's written, Alan Lane's going to say he was deceived as well. He's going to pull the benign neglect. What's your view? Do you think that Silbergate was complicit somehow and engaged in willful? No, 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 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 Swindler's criminals took advantage of them essentially being like a drug mule. I think they found a sleepy bank that wanted to become a big-time player 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 think about it. Why would you have SBF as your spokesperson? And then after SBF, 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 5% of what I really know, and more. So they're getting... I'm sure folks express regret. I'm sure Tom Brady has regret run SBF. 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 of that. I have no doubt. and it's through and through.

We're in full alignment around that. So what you're saying is, hey, look, it's a people at controls issue. And that's a good branch of the tree because willful violations of the law have serious consequences. Now, if it is not a willful violation, then it's a people at controls issue. 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'm seeing are changes at the management level and changes at the board level. We don't know if that's voluntary from the board or both, but we are seeing that.

So 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 some kind of catastrophic claim on the bank from the regulators. The regulators need points of control that they can govern oversight, and that today is Sylvigate, because Sylvigate is the leading crypto bank. They don't want those transactions to go on. anywhere else. What's going to happen, I think, 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 business will be curtailed significantly. So the company will have zero earning power. Because if you're borrowing its CD rates, I mean, the joke of the matter is Silver Gates 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'll at Cross-Sriver End, during PPP, we need liquidity to fund the working capital of 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 cash flows. But 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?

And then what I think you're going to get, Laura, in 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 Rahm 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 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 who make this show possible? DefySaver is an all-in-one management app. for the top lending protocols on Ethereum, including Ave, Maker, Liquity, 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

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chainelysis is here to help. Chainelysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigation support for all crypto assets for organizations like Gemini, Crypta.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting chainelysis.com slash unchained. Back to my conversation with Mark and Rom. So I did ask this earlier, and we didn't really address it, but I'm curious, you know, for that core issue of FTCS 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 no? A hundred percent.

And they're going to go through every single transaction and say, why did this happen and why did you let it go through? But wait, I have a question 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 FTCS 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. Those are USDA transfers because Silvergate, by law, cannot have crypto on its balance. It can custody crypto, and it does that through its agent, Silvergate.

Look, this is a matter of law. This that can be very clear on. What the regulators will look at is this. One, did Silvergate have an effect? Bank Secrecy Act, any money laundering, eGBSAML program, one. Did they have an effective policy and 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 system. Right, but wrong. Would any of that have any bearing on that issue of the FTX customer funding? It does. It does, because if you had a transaction with Alameda, let's say, which is your point, or FTX, and FTX is a bad actor, so long as the BSA-M-L 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 trying, if they were not engaged in filing SARS, if they were not looking at suspicious activity, if they weren't tying out the sender state 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 FTX through Silvergate back and forth, the numbers are so large. They are going to get scrutinized because the regulators were completely sleeping at the switch along with Al-Lan.

I mean, this is 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 horse is, is out of the barn. But the problem for Silvergate is it's not only FTX. It says, BitTRAX and I've identified, but have yet to come public with it, at least three more. So I think 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.

And more than three, you have a major problem. And I'm here to say, these guys have a major, a major fucking problem. Major problem. So one thing that I just want to understand is for the situation with FTCS and Alameda, when FTX transferred the customer funds to Alameda, that's against their terms of service. FTX's own terms of service. So that's kind of what that violation was.

So I just want to understand, because we're talking about the AML and KYC program at Silvergate, but is that kind of situation where like the violation is against the terms of service? Would the AML KYC processes have any relevance with that? Do you understand how in my mind they seem? I understand what you're saying. I'll simply say if there was no Sen network, if there was no send network, there would be no FTX or Alameda. They wouldn't exist. Okay. 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. part of all the lawsuits, Silvergate is going to be a defendant as sure as I'm sitting here. Because 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 money is gone. It's stolen. It's gone. You'll never get it back. Or you may get cents on the dollar back. But 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, J.P. Morgan, I think, paid $2.5 billion in the Madoff thing, and they didn't even touch the money. Okay. So I just want to break it out 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 Silvergate probably didn't have any visibility into because that was just, you know, FTCS and Alameda sending that, you know, on blockchain networks. And I don't remember if we described what CEN 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, bank 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 banked with the Silvergate and to move that money immediately. So, Mark, just to understand when you say that FTCS and Alameda would not have been able to do this without Sen, that's for the Fiat portion of whatever funds that moved. So are you talking about how Sam Bankman-Fried said that initially customers were wiring,

or F-T-X 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 Silvergate 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 this call it Alameda research. And they said before Silvergate existed, these crypto exchanges couldn't have happened. I mean, just flat out. And Alan Lane, foolishly, used SBF as a sponsor. And foolishly, he uses this bitchwrex guy. That's not a crime. It's not a crime. So, yeah, it's foolish.

I'm sure they have hindsight 2020. But 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 the bat spokesperson point. I don't think it advances the conversation. Well, it's going to turn out to be a big deal as it relates to those suspicious reports. reports 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 BitTX or BITREX 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 Then network. Do you disagree with that? I believe criminals, will seek to utilize crypto exchanges to attempt to laundering. That's not what I'm saying. I don't think it's relevant, Mark. I think the question is, do they have an effective BSA and L program? Was it applied or not?

That's what the regulars will look at. 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, multi, multi, multi billion dollar suits. I know at your core, you realize the heat that's going to come at Silvergate. So the two points that Mark is raising here, which are novel have been introduced yet, one is, hey, lawsuits. So the case with JPMorgan, you raise, it's a great point.

You say, look, they got a $1.7 billion fine on January 17, 2014, because despite their asset manager saying that Madoff wasn't suitable, for investment and they suspect a fraud, they enable funding that take place. So that's Mark's, 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 where their system of controls related to K.YC and AML. So it's a different framework than after due to do shares further. in order to file a claim of suit against Silbergate, 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 even have a plaintiff yet. And the complaint cites this Twitter thread from an anonymous person and an allegation, which isn't evidence. And it's a house of cards built on. this one Twitter threat, 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 plaintiffs to seek

remedy from Silvergate. But, okay, so I want to ask about this because, and I'm not sure that this is the class action lawsuit that you're referencing, but I'm just going to quote the portion 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 of 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 FTAX. So I was wondering, is it Silvergate's

responsibility to have recognized that those transactions shouldn't have happened, that FTCS customers should not have been wiring money into Alameda? Because it seems, you know, somebody, whether at FTCX or Alameda or somewhere, should have recognized this should not be happening. Laura, it's almost a different question. But could it be someone at 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 BSAML program? Did you monitor for CISP activity? If you saw activity, did you report it? And did you investigate further? the regulator will ask, did Soveregate have a reasonable basis in enabling those transactions? If they had a reasonable basis and they complied and they did whatever investigations they did, then Sovergate has low risk. If, however, So Silvergate did not apply their 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 in good standing, and that's why the regulars will let them grow their business. That's why they're able to acquire the DM stable coin. But why isn't that negligence? You know, this is all prior to 930. I mean, 930 doesn't matter.

I mean, I agree. I like your 930 point, Mark. I like your 930 point. 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 correspondence. It's not easy being a bank. They were scrutinized well before 930, 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 of the bank regulators. Again, he issued a requirement requiring non-objection from the primary regulator. So what I'm saying, Mark, is I agree your point 930. Can't wait to year end. And we are speculating here. Yeah. But the regulators 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 BSAML.

They're looking at those transaction documents. They're looking at the back and forth the client. They're looking at the SIP program and the raw data even before 930 at a granular level. But wait. And Rom, why is it that you said that they wouldn't, the regulators wouldn't deem, you know, Silvergate allowing FTX customers to wire Alameda, funds to Alameda as negligence? Why? They're not regulated as an asset manager.

An asset manager's fiduciary that the duty of care to LPs. And JP Morgan 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. Silver Gates 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 to LP. So A16C cannot sue

suburbate or have standing because they lost money in FTX because FTX was a fraud. That would be the JPMorgan analogy. If JPMorgan said FTX is a fraud and JPMorgan processed the wire for A16C, you could argue that it's 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 that Silvergate was negligent in any of the things Rahm 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 Silvergate would have banked them. How do you know they weren't filed? How do you know they weren't filed, 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 jail guy or anything like that. You're saying you take the name off the site. That's the basic idea. For sure. Now, the other part is, again, we don't, the fact that FTX is a fraud, which I'm in complete agreement with you, that guy got to go to jail. Okay. No, it's not only fraud. It's a criminal operation. And the, and the question, And the question is, the real question where I think it's going to turn is what role did Dan Freberg have in all of this along with SDF?

Right. And 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 FTCS and Al-Media, meaning the mere fact that FTCX is a fraud is, not indicative that there would be transactional data. And criminals use the Send Network to transfer up to a trillion dollars, a trillion dollars.

It's just they facilitate the movement of stable. It does, it will not matter at all. We're not talking about JP Morgan and we're not talking about it too big to fail banks. We're talking about a bail, a bank run by an absolute clown. Alan Lane is a clown. He is, he at best, 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, Rom, would you have your son-in-law as the head of risk of any institution you would run? I'm not, I'm not under public scrutiny, but I will say this.

Ron, answer the question. Mark, 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 gets started, is 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 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 problem. Now, Mark, they've upgraded management and the Senate laws know they're working in that capacity. So I'm just acknowledging they're remedying issues around people and controls.

Yeah, okay. But so I want to 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 FTCS 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 the traditional financial world, but I've seen so many banks get 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 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 they're business their business right now is an absolute free fall and they still have other customers who are under significant stress who may go bankrupt or or fail 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 one what their funding has done and their new costs 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, Rahm'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 at the senior levels, like had a 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 is only capped at $700 million. 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 J.P. Morgan or Bank of America or City or Wells, which is too big to fail. Then the rules of the road will change. You know, 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 verified. 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 untoward. The last bit was, you know, we mentioned this class action lawsuit, which Rom said he felt the plaintiffs had no standing. Do you think there's merit in it?

And if so, where do you think that might go? That's not the class action lawsuit that's going to get them. The lawsuits that's going to get them is they're going to be named in every. who lost a dime at FTS. 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 tests that Rahm talked about, rightly talked about, 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 are former employees who've reached out to me through my DMs and other means where the picture they paint

is so bad, it's so bad it's downright scary. And I forwarded those things off to the regulators who I'm in close contact with. And I just give them everything. I got to respond to the Warren question and then whether regulators will allow this bank to fail or not in the negligence point. Yeah, yeah, I was going to ask you how you think things will play out. Let me go through that. So first up, that Warren letter simply restates the allegations from an anonymous tweet thread. And it doesn't actually add any information. It says, Sylvanicate appears to be at the center of improper transfers.

Well, of course, or leaving crypto bank. They said it could constitute violations of law. This is just restating known law and known facts. I will 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. who had a letter against Wells Fargo last month. He's prolific. I spoke to a shortseller 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 for good name around this anonymous tweet thread that has these highlighted documents and drawings that are looking nefarious. Again, there's no evidence. They're allegations. Now, when we talk to bank failure, 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 Silvergate's assets exceed the liabilities, even if you take in Mark's worst case right down. So the depositors are not at risk here. And the regulators, again, we agree, it seems like as of 930, Silvergate was in good standing. You don't go from good standing to we're going to take your bank out 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 whether there is negligence or not. I have not seen evidence of that. Mark is alleging he's seen evidence of that. Look, there are other trust banks in the crypto ecosystem that have received consent orders. Okay? 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-KYCed, they hire a new BSA AML leader, and their contailments on growth. That was the consequence of some deficiency in the BSA-M-L 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 BSA-ML, which I haven't seen evidence, then what we should expect is something like a consent order with a similar treatment and consequence for Silvergate. Okay. So you guys have both laid out great arguments. Like, you know, I'm not in a position to past judgment, but 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, if you found out something, what would make you change your mind? Mark is going to stay committed to this position. You want to go ahead? No, he may not. He looks like he's thinking. And by the way, Rahm, I meant to ask you because Mark disclosed earlier that he short, Silvergate? Are you, do you have a, are you? Good question. I did put a long position on last week.

We don't have a view at Lumida yet, although we have a track 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, I think you did. 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 have, I would have shorted FTCS 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'd 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 former employees talked to the FT person. And they're talking to me and the procedures and, how they go about doing business 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 and 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'm curious on Rom's sake, these guys aren't going to earn any money. So they're going to start losing money probably in a big way shortly. And from an earning

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 Allen 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 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 something else,

from 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, very negative sign, a very, very bad. I generally agree with that statement, by the way. Yeah, 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 it's just the optics here are very, very bad. Ron, you know, I want you to answer what information would make you change your mind. Yeah, sure. Evidence. Evidence would change my mind. Hard data. And I'm looking forward to a few catalysts. I'm looking forward to insured company reporting, insured 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 shift from short interest going from 20% to 40%. So every short has to cover at some point its future demand on that side of thing. So that's what I would look for. I agree with Mark that short-term earnings would be challenged their funding higher. That's not the main driver of valuation. Banks in general are valued at a price-to-book ratio that oscillates around 1. It's higher if you grow more quickly. It's lower, if you have a lower business, the price-to-book ratio is around 0.5.

Even if you accept Mark's argument around the write-down, which I haven't seen evidence for 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 just study it clinically independently. I'll DM me or email. I'll send it to you. But they're not growing around. They're going to be declining huge in 23. Huge. The numbers are coming way down. Right. One last point on the, and you're right, 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 coin. base or other leading exchanges are going to move away from them. They're a long silver gate.

It doesn't mean they have to be long in the stock. They're long the business model. Silver gates indispensable to the function of the crypto exchanges, which appears to be, I think we're in agreement around that. But lastly, in the short point, look, shorts play a valuable role in coin out fraud, like muddy waters in China and Carersdale. 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. 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 Senator 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 intracorder where they can in a manner that has to comply with law. Again, they can't talk about suspicious activity that itself could violate the law.

If price the book for Silvergate goes back to 1 or 1.2 in a 2-3-year timeframe, which is my outlook, then you've got like a 2x here. But I agree, look, the next year, you know, we get away from our data. And I go back to your point around JP Morgan, Mark. So again, in January 17th of 2014, when they got a $1.7 billion fine for the made-off of enabling that wire transfer, which again, is 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 and January 14th held it to today, that's eight years later, you'd be up 190%.

That's a three-ex return. That's a venture capital outcome. I'm not saying that's not really going to happen here. All I'm saying is dislocation. to 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 enjoy the back and forth here, Mark, around this. Yeah, all's good.

I'll just say Alan Lane is not Jamie Diamond. Alan Lane is a fucking clown. You hold it to an impossible stance. Somebody gets a sub-1 billion dollar community bank. But I'm just saying a silver gun. Gate disappears tomorrow, no one will miss them. No one. No one will miss it. 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 a lot of, at least crypto business

owners will be interested in because I think a lot of them probably bank with Silvergate and a lot of, you know, exchange customers will be affected if anything happens to them. So, We're going to have to see what happens. Obviously, there's going to be a lot of eyes on what they say December 19th, et cetera. But I just loved having both of 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 Rahm's a good guy. 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 I just kind of speak from the, speak from the mind and the heart and I appreciate having me. And it was nice getting to know you around. Likewise, Mark. And again, thank you for the kind words. And I think you have, again, you're credible and I appreciate that

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 official Lumida 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 an 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're going to 12 to 13% yield. So there are different opportunities. Feel free to reach out to Lumida at Lumida.com. You can find me at Twitter at Ram Alalaliyah. Just briefly, closing argument, then is critical market infrastructure, Coinbase, the other exchanges need them. They have benefit from a network

effect. They have a dominant leading position of 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 around enforcement and clash actions. We disagree on the probability and severity of those actions, as well as this kind of balance sheet impact, which I will study more closely and we'll follow up with Mark around that. So, you know, 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 bulk case is that creates a near term dislocation opportunity. Silver Gates traded down in lockstep with Coinbase. Fundamentally different business models. Coinbase is pro-cyclical. They make money on transaction fees. Silvergate has recurring revenue, $8 to $9 million in fee income, plus they're generating net interest.

income with zero credit losses on the crypto book. And they have U.S. credit risk from the U.S. government. So I'll wrap up there. Yeah, I think, I mean, we've gone through just so many arguments on both sides. I mean, both of you just make such good points. So, you know, I think we're going to have to see how things play out from here and 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 see what happens there. But thank you both again. It has been such a pleasure having you both on Unchained. Thank you, Beth. Thank you, Laura. Thank you, Mark. 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, without from Anthony Yun, Mark Murdoch, Matt Pilchard, Juanor Ranovich, Sam Shreram, Pamajimdar, Shashon, and CLK transcription. Thanks for listening.