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

When Jean Chalopin applied to buy a tiny bank in Washington state nearly three years ago, he promised to bring ATM cards and other innovations to a place with few local banking options.

Farmington State Bank's business plan would not change if it were to be acquired by Mr. Chalopin, a former TV and film producer who co-created the "Inspector Gadget" cartoon, he assured federal regulators in documents viewed by The Wall Street Journal.

The bank changed its name to Moonstone and began targeting high-risk industries like cryptocurrency and cannabis. Alameda Research LLC, a crypto-trading firm owned by Sam Bankman-Fried, became a new shareholder.

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

In November, Mr. Bankman-Fried's crypto empire collapsed, 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 in December, 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 subpoena is seeking information on the circumstances surrounding the collapse of the company and the role that Mr. Bankman-Fried and other insiders may have played in it.

The Justice Department seized approximately $50 million from an FTX entity that was being held at Moonstone in early January. This represents approximately 77% of the total deposits that the bank reported holding at the end of 2022. Moonstone has said that it is getting out of the cryptocurrency and cannabis industries and returning to its community-banking roots.

"The bank is still the same, but it has a cloud over it," said Todd Lobdell, a Farmington resident and former director of the town's public works department.

In the fall of 2019, Mr. Chalopin began laying the groundwork to purchase Moonstone.

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

After leaving show business, Mr. Chalopin 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.

The next target for Mr. Chalopin's company would be Farmington. They agreed to buy the bank for $3.1 million in cash. When asked about any significant changes in services or products that would result from the transaction, the lawyer's answer was "not applicable" in the April 2020 application to the Fed.

The lawyer wrote that the applicant does not intend to change the business plan of the bank.

Moonstone later said 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 person close to Moonstone said that the application doesn't reflect the confidential discussions the buyers had with regulators or the amendments to its business plan following the acquisition.

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. A lawyer based in Seattle, Mr. Friedberg had worked for local banks before pivoting to blockchain and becoming an early adviser to Mr. Bankman-Fried.

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

Alameda's investment in Moonstone was primarily motivated by the idea that FTX could offer crypto-yield programs in a way that would bypass Securities and Exchange Commission regulations, according to people familiar with the matter. 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. The SEC argues that these programs are similar to bank-issued investment products that are exempt from registration as securities because banks are subject to a different regulatory regime.

FTX executives were looking at ways to structure a crypto-yield program that Moonstone would be able to offer under an exemption. However, no such program ever launched. In recent months, several companies offering similar crypto-yield programs have gone bust, leaving millions of depositors uncertain about whether they will get their money back.

After Alameda's investment, Moonstone's deposits grew to $84 million by Sept. 30, thanks in large part to FTX. Assets also grew to $99 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. The bank also explained that it was going to launch its own cryptocurrency.

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

In January, Moonstone announced that it was returning to its roots and reverting to its old name, Farmington. This decision was made in light of the recent events in the cryptocurrency industry and the resulting changes in the regulatory environment.