Silvergate Bank: Smoke on the water turns to fire in the sky
by Jason Meyers of Auditchain
Trust in centralised entities, or lack of it, is on the top of everyone’s mind these days. The seemingly endless contagion from the fallout of Luna, Celsius, 3AC, FTX, is raising the question of when it will end?
Just when you think it might be over, Silvergate Bank succumbed as the next victim. Silvergate just announced that it will be winding down its operations in an orderly manner in accordance with regulatory processes. So, who’s next?
Meanwhile, the evolving elegance of decentralisation continues to orchestrate the transfiguration of the financial system for the financial emancipation and betterment of society. In the wake of the storm of all these failures, DeFi protocols were systemically and structurally sound. The weather is beautiful.
At the same time, the regulatory imperialists of the legacy system are “shooting bazookas at bunny rabbits”, as Caitlin Long so eloquently stated in an interview last week in response to a denial of an application for a Fed Master Account with a 108% reserve filed by Custodia Bank – a Wyoming based special purpose depository institution serving the crypto space founded by her.
The common theme in all these failures is a lack of sufficient technology architecture, effective risk management, controls and foresight by centralised entities that serve the crypto space. Its like they are trying to retrofit a Tesla with a carburettor. It’s bound to blow up when you stomp on the accelerator.
Where there are humans and money under one roof, there needs to be precise and strict internal and disclosure controls, especially when its other people’s money.
Weak or non-existent internal and disclosure controls are always the smouldering signs of impending doom. The Declaration of John Jay Ray III in support of the bankruptcy of FTX raised the public’s consciousness of these subjects. Let’s face it, they’ve been boring topics until now. Let’s hope the public learns from current events.
The truth is internal and disclosure controls at Silvergate were deficient long before FTX filed for bankruptcy. We will show you in this article.
The focus of Auditchain Labs AG is all about raising the integrity and reliability of global disclosure and assurance processes and the financial information articulated in such disclosures.
On March 1 2023, Silvergate Bank filed a Form NT-10K which is a notice of an extension of time to file its annual report on Form 10K. For large, accelerated filers an extra 15 extra days is permitted for filing annual financial statements. We now know why the narrative in the NT-10K stated: “The Company is working diligently to file its Form 10-K as soon as possible, but does not expect to be in a position to file the Form 10-K by the extension date of March 16, 2023”.
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The more ominous statement that the company made in the filing was: “In addition, the Company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements.”
That question was answered in its latest 8-K filing, as it goes down for the dirt nap.
Do you think Silvergate went from a healthy bank to being decimated overnight? Of course not. Sure, they were hurt by the FTX contagion, but weak controls are like termites that ceaselessly eat away at the foundation until it all comes tumbling down.
The Auditchain Protocol features Pacioli, an AI based logic and reasoning engine that acts as a validating node. It uses cryptography and a semantic ontology to detect deficiencies in internal and disclosure controls for operating entities as well as conducting a Proof of Financial State external validation. In other words, it performs an audit, but we don’t use that word because it does so WITHOUT the need for a centralized assurance provider.
The Pacioli Node was able to give clues to the existence of deficiencies with internal, risk and disclosure controls. These deficiencies manifested themselves in the form of a total of 145 inconsistencies contained in the last four financial statements filed with the SEC. ONE HUNDRED AND FORTY FIVE!!
- Financial Statements for the period ending September 30, 2022
- Financial Statements for the period ending June 30, 2022
- Financial Statements for the period ending March 31, 2022
- Financial Statements for the full year ending December 31, 2021
The various inconsistencies were related to a range of items including “financing receivable excluding accrued interest before allowance for credit loss” for each period, failures to include other disclosures and other inconsistencies.
If Silvergate implemented tighter controls, they might still be alive today. Almost half of all financial statements filed with the SEC, ESMA and Companies House by reporting entities contain inconsistencies that render them unreliable.
Investors will be able to perform analysis on any public company as soon as the Auditchain Protocol hits Mainnet this year.
Regulators around the world are in gross dereliction of their duties to protect investors by failing to provide adequate technical specifications for assurance and financial disclosure for banks and other reporting entities.
If they can’t fulfil their mandate to protect investors in the legacy world, how do we expect them to regulate crypto?
About Jason Meyers and Auditchain
The Auditchain Protocol was conceived by its lead architect, Jason Meyers. Jason took many companies public including Alexion Pharmaceuticals which was acquired by AstraZeneca for USD$41 Billion. Jason claims that he missed the crypto boom of the roaring 20s as the result of his focus on the Auditchain Protocol. He has a strong belief that the activities that are occurring in crypto could kill innovation. He strongly believes the crypto space needs to find a way to regulate itself or be subjected to politically imposed and misguided regulations that may one day make us all wonder what a good idea blockchain could have been.
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