The Federal Reserve Board recently took the reins and commanded the winding down of operations for the FTX-linked, Farmington State Bank, following its undisclosed involvement in digital assets. The turn of events comes as a thunderbolt to the bank which trades under the alias Moonstone Bank and had marginally shifted its stance towards digital assets in 2022 but without notifying its overseers.
Caught in a web of regulations, Farmington, whose trajectory took a sharp twist after a change in direction towards a pro-digital assets approach, failed to get the necessary approvals from supervisors to legitimize its new stance. The rug has thus been pulled from under its feet, with the Washington-based bank now barred from dissipating cash assets, making dividends or capital distributions, or participating in certain activities without the green light from its supervising authorities.
The surprise pivot stands in contrast to an agreement the bank signed with the Reserve Bank on its ascension to bank holding company status two years prior. Under the agreement’s clauses, Farmington had pronounced itself committed to steering clear of specific “digital bank operations”, while simultaneously pledging not to tweak its original business plan. Critics might then wonder if a promise was all it was.
The bank’s secretive digital ambitions, as detailed in the enforcement documents, allegedly went further than mere intent, collaborating with an unidentified third party to create an IT infrastructure ready to “facilitate…the issuance of stablecoins”. All this, with the potential to rake in half the mint and burn fees on a select few stablecoins.
Long-time observers of Farmington highlight its historical role as a community lender, largely forsaking the allure of digital assets, favoring traditional banking services. Yet, in a staggering change of heart coinciding with an acquisition of an $11.5 million stake by FTX subsidiary, Alameda Research, the bank set soil on the previously uncharted territory of digital asset management.
The drama hasn’t stopped there. In an additional twist, federal prosecutors have seized an astounding $50 million from Farmington. The hefty amount is allegedly tied to a deceptive investment scheme related to cryptocurrencies. All this underscores that while digital assets harbor vast potential and enticement for both old and new banks, transparency remains king in warding off the regulatory hammer. The Farmington case serves as a stark reminder of the dual-edged sword digital assets represent in today’s financial canvas.