Fed censors Farmington State Bank for breaching operational terms following $11.5 million deal with FTX Group

The Federal Reserve has censored Washington-based Farmington State Bank, issuing a cease and desist order after the financier secretly violated terms of operation in relation to FTX Group’s Alameda Research in 2022.

Also Read: UK regulatory body mandates collection of information about cryptoasset transfers from September 1

Fed censors FTX-affiliate Farmington State Bank over Alameda Research ties

The Fed wants Farmington State Bank to close down after the financial institution went against the terms to start engaging in crypto-related activities. Based on the enforcement action, the bank discretely and without permission forayed into the digital asset space to start “making dividends or capital distributions, dissipating cash assets and engaging in certain activities.” 

In a joint enforcement action, therefore, the Fed and the Washington State Department of Financial Institutions are clamping down against Farmington for contravening its business plan to start crypto-related operations. Specifically, the bank is facilitating stablecoin issuance, which goes against the initial terms stipulated by the Reserve Bank.

The breach started after Farmington State Bank entered a partnership with FTX Group’s Alameda Research, causing it to shift focus from traditional finance operations to digital asset-related activities. This followed an $11.5 million capital injection from the hedge fund in exchange for a non-controlling stake.

Resultantly, the bank is now caught in the crosshairs of efforts to try to bring FTX founder Sam Bankman-Fried (SBF) to book. Notably, this is not the first time the bank suffered for its ties to the convicted ex-crypto executive, with records pointing to a $50 million seizure by federal prosecutors from the bank, with claims that it was SBF’s deposit in his heist involving customer investments before his crypto empire imploded.

Meanwhile, SBF will spend the next few months in jail, awaiting the October trial. It came after Judge Lewis Kaplan revoked his bond, bringing an end to his house arrest sentence and beginning another in what has been described as a low-condition jail. He faces seven charges, with “securities fraud, wire fraud, commodities fraud, and money laundering among the most pronounced.

Other charges include SBF and fellow FTX executives borrowing over $1 billion from Alameda and injecting these into investments in the name of Bankman-Fried and his associates instead of the company, Alameda. With this, therefore, SBF was able not only to hide the close connection to Alameda but also the criminal source of some of the funds.

As reported, four co-conspirators have already pleaded guilty, Caroline Ellison, Gary Wang, and Nishad Singh, and will testify in court for a deal, but the fourth, Ryan Salame will not be testifying despite him being the one who channeled donations to politicians.

In related news, Digital Currency Group’s (DCG) subsidiary, Genesis Capital, and FTX have agreed to a bargain that will see Genesis pay FTX’s sister firm and trading division, Alameda Research a sum of $175 million, a settlement fee from its $3.9 billion debt. The agreement comes as both firms navigate the murky waters of bankruptcy, with Genesis relinquishing all claims against FTX.

The deal comes as FTX Group, steered by current CEO John Ray II, look to plough back as much debt as possible, with potential sources including “politicians, hedge funds, and fellow cryptocurrency companies,” to whom Sam Bankman-Fried may or may not have issued funds to illegally.

This agreement is the result of a close association between FTX, Alameda Research, and Genesis, with FTX’s legal team overseeing the bankruptcy asserting that Genesis was critical in providing liquidity to FTX while participating in its unscrupulous business models.

This close-knit association led to Genesis having loans as high as $8 billion to Alameda at some point, threatening its mother company’s (DCG) capability to settle its own financial exposure to creditors, including Gemini, the crypto conglomerate established by the Winklevoss twins, Cameron and Tyler.