How a Tiny Bank in a Washington Farming Town Got Tangled Up With FTX

But it wasn’t long before the bank got a new name, Moonstone, and new target customers in the high-risk cryptocurrency and cannabis industries. It also got a new shareholder:

Sam Bankman-Fried’s

crypto-trading firm, Alameda Research LLC. 

Alameda paid $11.5 million for a stake in Moonstone at a roughly $115 million valuation, which was 37 times the $3.1 million Mr. Chalopin paid for the bank 18 months earlier. Executives from Mr. Bankman-Fried’s crypto exchange, FTX, discussed using the bank to offer interest-bearing crypto accounts and lend out depositors’ digital assets, according to people familiar with the matter.

Mr. Bankman-Fried’s crypto empire collapsed in November, thrusting the little-known bank into the spotlight. Lawmakers are pressing for information about whether Alameda used FTX customer funds to pay for its stake in the bank. Mr. Chalopin, a pair of Democratic senators noted in a letter to banking regulators last month, chairs Deltec International Group, the crypto-friendly Bahamian bank with close ties to FTX.

Last week, the new management team steering FTX through bankruptcy asked a judge to approve a subpoena for records related to Moonstone from Mr. Bankman-Fried and other FTX insiders.

The Justice Department in early January seized about $50 million that an FTX entity held at Moonstone—about 77% of the total deposits the bank reported holding at the end of 2022. Moonstone said it is getting out of crypto and cannabis and returning to its community-banking roots. 

“It’s still the same bank, it just has a cloud over it,” said Todd Lobdell, a Farmington resident and former director of the town’s public works department.

Mr. Chalopin began laying the groundwork to buy Moonstone in the fall of 2019. 

It had $8.4 million in assets at the time, largely in the form of loans to farmers in an area where lentils are the cash crop. Its president, Tanya Thygeson, was a lifelong resident of the bank’s eponymous hometown. She rose from teller and has held roles as a town paramedic and librarian, according to a local press report on her 2018 promotion.

After leaving show business, Mr. Chalopin had found a second act in banking. A native of France, he eventually settled in the Bahamas and amassed a roughly 47% stake in Deltec, according to the purchase application filed with the Federal Reserve. By early 2020, Deltec had established itself as one of the leading banks to crypto companies, including Tether Holdings Ltd., the issuer of the tether stablecoin. 

Farmington would be his next target. A company owned by Mr. Chalopin agreed to buy the bank for $3.1 million in cash. When asked to list “any significant anticipated changes in services or products” that would result from the transaction, “not applicable” was his lawyer’s answer in the April 2020 application to the Fed.

“Applicant does not intend to change the business plan of the Bank,” the lawyer wrote.

Moonstone would later say that it had pursued an “innovative startup business model” to serve crypto and cannabis businesses since its 2020 acquisition. The bank quickly brought in a new executive team and board members from companies such as fintech startup Revolut Ltd. and crypto exchange Gemini Trust Co. 

The application doesn’t reflect confidential discussions the buyers had with regulators or amendments to its business plan following the acquisition, a person close to Moonstone said. 

Moonstone’s parent company announced the Alameda investment in March 2022. Dan Friedberg, FTX’s chief regulatory officer, served as a liaison between the two companies, people familiar with the matter said. A lawyer based in Seattle, Wash., Mr. Friedberg had worked for local banks before pivoting to blockchain and becoming an early adviser to Mr. Bankman-Fried.

Alameda was attracted to a Moonstone plan to offer a payments network that would let crypto companies send dollars between Moonstone accounts, people familiar with the matter said. Other crypto-friendly banks, including Silvergate Capital Corp., already offered similar networks. 

But the primary motivation for Alameda’s investment in Moonstone was an idea that FTX could offer crypto-yield programs in a way that would bypass Securities and Exchange Commission regulations, people familiar with the matter said. Such programs allow investors to earn interest on their crypto by depositing their digital assets into a common pool. The assets in the pool are then lent out to borrowers, typically sophisticated trading firms that use the crypto to fund various trading strategies. 

The SEC has sought to block similar crypto-lending programs offered by companies such as BlockFi Inc. on the grounds that they are unregistered securities. Certain bank-issued investment products are exempted from having to register as securities because banks are subject to a regulatory regime separate from the SEC. 

FTX executives were looking at ways to structure a crypto-yield program that Moonstone would legally be able to offer under this exemption, the people said. No such program ever launched, and several companies offering similar crypto-yield programs have gone bust in recent months, leaving millions of depositors uncertain whether they will get their money back.  

After Alameda’s investment, Moonstone ballooned. Deposits grew to $84 million by Sept. 30 from $12 million at the end of 2021, according to regulatory filings, thanks in large part to FTX. Assets grew to $99 million from $18 million over the same period. 

Moonstone’s balance sheet was conservative, despite the riskiness of its client base. Around two-thirds of its assets as of Sept. 30 were excess bank reserves that it lends to other banks. Still, Moonstone reported a net loss of $3.7 million that quarter, worse than the $537,000 loss from a year earlier. 

After FTX and Alameda collapsed, Moonstone sent a notice to its local customers assuring them that their money was safe, Mr. Lobdell said. Yet the bank also explained that it was going to launch its own cryptocurrency.

Moonstone later distanced itself from its shareholder and largest depositor. The bank placed a hold on FTX’s account, citing “an attempt by potentially unauthorized persons to withdraw the funds.”

Moonstone never launched a payments network. Earlier this month, the bank said it was going back to basics, and the old Farmington name, citing the “impact of recent events in the crypto assets industry and the resultant changing regulatory environment relating to crypto asset businesses.”

Write to Peter Rudegeair at [email protected], Alexander Osipovich at [email protected] and David Benoit at [email protected]