A California court has dealt a blow to Silvergate Bank's attempt to distance itself from the FTX debacle. In a lawsuit filed by FTX users, Silvergate now faces allegations of aiding and abetting the crypto exchange's alleged fraud.

The Case Against Silvergate

The lawsuit hinges on accusations that FTX transferred customer funds to its affiliated trading firm, Alameda Research, potentially to cover risky bets. The plaintiffs claim Silvergate, as FTX's bank, knowingly facilitated these transfers, enabling the alleged fraud.

Judge Ruth Bermudez Montenegro's recent order dismissed Silvergate's motion to dismiss the case. Montenegro found the plaintiffs adequately argued that Silvergate was aware of, or should have been aware of, FTX's actions.

Numbers Tell a Story

The court order highlighted a stark financial connection between Silvergate and FTX. Before onboarding FTX as a client, Silvergate's annual income was a modest $7.6 million. After FTX joined, that figure skyrocketed to a staggering $75.5 million, fueled by transaction fees and interest on FTX and Alameda accounts.

Silvergate's Defense Crumbles

Silvergate argued they owed no duty of care to FTX customers and that freezing withdrawals (a trigger for the FTX collapse) wasn't their responsibility. The court rejected both claims.

Montenegro pointed out that allowing non-FTX deposits of customer funds was "foreseeable" to lead to fraud. The judge also dismissed Silvergate's assertion that FTX would have found another bank, noting Silvergate's unique position as a crypto-friendly institution.

Meanwhile, 3AC Founder Remains Unapologetic

Adding another layer to the 2022 crypto winter narrative, Kyle Davies, co-founder of collapsed hedge fund Three Arrows Capital (3AC), recently denied any wrongdoing related to his company's demise. In an interview, Davies defended his actions, stating, "companies go bankrupt, almost every company goes bankrupt, right?"

Terra's Downfall: A Domino Effect?

The lawsuit and Davies' interview highlight the interconnectedness of the crypto industry. The collapse of TerraUSD (UST), a stablecoin pegged to the US dollar, in May 2022, is believed to have triggered a chain reaction. When UST lost its peg, its sister token, LUNA, hyperinflated, causing significant losses for 3AC, a major LUNA holder. This, in turn, is believed to have contributed to FTX's downfall.

The Silvergate case continues, potentially setting a precedent for how banks interact with the crypto world. With Davies' defiant stance, the spotlight remains on the accountability of industry players in the wake of major crypto collapses.