Washington regulator DFI doesn’t need ‘new laws’ to ‘stop bad guys’ in crypto

On Dec 2, 2022

As more and more of the tentacles from Alameda, FTX, and Sam Bankman-Fried are exposed within the financial system, regulators continue to be asked difficult questions in the wake of the devastation.

Moonstone Bank, previously known as Farmington State Bank, has increasingly found itself under intense media scrutiny for two main reasons.

First, Moonstone accepted an $11.5 million dollar investment from Alameda Research in March of 2022. The investment, for 10% ownership, valued the bank at $115 million — a large sum compared to the $10 million in customer deposits at the time and interesting given that customer deposits sharply increased afterward.

Second, Jean Chalopin, who used an entity called FBH to purchase Moonstone, is also chairman of Deltec Bank & Trust – a bank heavily named throughout the Bahamas Papers and known to be the bank of choice for both FTX and controversial stablecoin issuer Tether. Deltec Group also owns Delchain, a top minter of Tether. FTX and Alameda had at least 17 bank accounts with Deltec.

In a previous discussion with Protos, the Federal Reserve admitted, “Bad things can happen, even when you think things are in order.”

Most recently, we reached out to the Washington State Department of Financial Institutions (DFI), which had a much different perspective on the current state of regulatory affairs.

Roberta Hollinshead, the Director of Banks for the Washington State DFI — which oversaw Moonstone before its transition to a Federal Reserve Member bank – said there was a lot of “misreporting around the investment [in Moonstone Bank] from Alameda.”

“No approval was needed from the DFI” to accept the investment because it was a minority ownership stake, she said.

Hollinshead assured the public that Jean Chalopin, head of FBH (owner of Moonstone) and Chairman of Deltec Bank & Trust, had “followed through with all of the statutory regulations… international background check,” and oversight from both the “Washington DFI and the Fed.”

She also admitted that of all the state-chartered banks associated with cannabis and digital assets, “Moonstone is the only one that’s a Fed member,” though “some other banks have holding companies that are regulated by the Federal Reserve.”

“Any bank that’s in a significant growth mode, we are very active in regulatory and supervisory roles,” she insisted.

The real surprise, said Hollinshead, was the fall of FTX. “It’s astounding,” she said, “it’s exposing weaknesses in the regulatory oversight of these companies.”

“I hope SBF is held criminally and civilly liable,” Hollinshead said.

Protos was additionally able to speak to Lucinda Fazio, the Director of Consumer Services for the Washington DFI. Fazio is also familiar with money transmitter services licensing.

One of the main problems that Fazio said the DFI had encountered pre-FTX collapse was consumers being unable to buy assets as the price climbed — quite the opposite to what’s being seen now.

Fazio also acknowledged that BlockFi was registered in the state of Washington, saying, “it’s early days… we issued a temporary cease and desist,” which she admitted was a “pro-forma to not violate the laws of the state of Washington.”

“We’re limited in what we can do now,” she said. “I hope Sam Bankman-Fried is held criminally and civilly liable.”

“I can’t do anything about someone sitting at home dreaming about a crime to commit,” said Fazio. “The laws in Washington are robust, I don’t need any new laws to catch the bad guys.”

But when Protos reached out to a former regulatory lawyer for comment, they gave a contrasting view. “The only thing that [regulators] should be doing is sitting around and thinking about how people are committing crimes. That is the primary job of a financial services regulator.”

The lawyer, who asked not to be named but spoke to Protos on background, continued: “If you see a major foreign entity purchase a small bank, that should immediately raise red flags.”

“It triggers a responsibility to review that with the closest scrutiny. The other job regulators have is not just to ferret out who’s committing crime, it’s to obtain enough documentation so that the regulator can act quickly and efficiently when it becomes clear a crime has been committed.”