Moonstone: How a state charter for a tiny bank in Farmington could have built a financial empire

Farmington, a town of about 150 residents in the wheat fields of Washington, offered everything necessary to create a financial-trade superpower to rival London or Hong Kong.

But the town never was the target or the prize.

It’s the charter of the little bank at the corner of Main and 1st streets that investors coveted. That charter, approved by state and federal regulators, provided a foot in the door to open the legitimacy of the banking industry to the world of cryptocurrency.

That’s the empire-builder vision contemplated by Joseph Vincent.

For 18 years, Vincent worked as the director of legal and regulatory affairs for the state’s banking watchdog, the Washington State Department of Financial Institutions.

In that role, he was the agency’s general counsel until he resigned in May 2021. A year later, he became legal counsel for one of the smallest banks in the country, Farmington State Bank, and its newest subsidiary, Moonstone Bank.

“Right now, there is a window of opportunity for which only a few places on earth have the concentration of tech talent and a reputation of world trade that could make them (or sustain them as) pre-eminent in both trade finance and international” exchange of currency for goods or services between two businesses or “B2B payments,” Vincent wrote before he joined Moonstone.

Farmington Bank and its online-only sister bank Moonstone are now ensnared in the multibillion-dollar collapse of the world’s third-largest cryptocurrency exchange.

The bankruptcy of FTX highlights the volatility of an unregulated and new type of currency that is based on a complex web of computer self-verification. Farmington and Moonstone are listed in FTX’s bankruptcy filings as assets.

Vincent did not respond to interview requests last week from The Spokesman-Review.

But he wrote extensively in 2021 in what he called “blawgs” about both his experience in lobbying to modernize the state’s outdated banking regulations and his belief that banks should absolutely embrace what he believes is the massive potential of trading cryptocurrency.

“Before my retirement from DFI on May 1st, I had the privilege of working with the Division of Banks and its stakeholders to bring all of Washington State’s banking laws into the 21st century and give it a structure from which it will be adaptable to the demands of this century going forward,” Vincent wrote.

He noted that the state fostered the growth of industry giants Weyerhaeuser, Boeing, UPS, Microsoft, Costco, Amazon and Starbucks.

“More important than wealth management is the creation of wealth in the first place,” Vincent wrote. “And for that, you need a preponderance of folks and ideas pulling their oar, as it were, in the same direction.

“Every global financial services hub reached that status and reputation on the strength of its facilitation of venture capital and the financing of trade.”

It’s that venture capital, some $11.5 million in January from Alameda Research, that now has thrust the tiny bank in Farmington into a national conversation surrounding cryptocurrency, volatility, bankruptcy and regulations.

Colossal collapse

Before last month, Farmington State Bank hadn’t generated a major newspaper story since a profile noted in 2010 that it offered no credit cards or even online banking.

It has occupied the same one-story building since 1911, when it moved out of offices located over the top of a saloon.

The 26th-smallest bank of 4,800 nationwide, it nonetheless caught the attention of Jean Chalopin, who in 2020 formed FBH Corporation and bought the bank under a stated plan to support the underserved cannabis industry.

It’s not Chalopin’s first bank.

According to published accounts, Chalopin was the founder of Deltec International Group, which is located in the Bahamas.

Deltec was built to serve cryptocurrencies, which are used as units of exchange through computer networks that are not reliant on security backing from governments or banks.

Deltec’s top client is Tether, which reportedly has $65 billion in assets and is licensed in the British Virgin Islands. It offers stablecoin, which is one of the few cryptocurrencies that reportedly is backed by U.S. dollars.

FTX, founded by Sam Bankman-Fried, is a Bahamas-based cryptocurrency exchange that at its peak in 2021 had more than a million users and was the third-largest trader in digital currency by volume.

FTX and its investment arm, Alameda Research, were also major partners with Deltec.

But everything began to unravel on Nov. 11, when Bankman-Fried suddenly announced he was filing for Chapter 11 bankruptcy.

“I’m really sorry, again, that we ended up here,” Bankman-Fried wrote on Twitter. “Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them. Ultimately hopefully it can be better for customers.”

Washington connection

It’s details in those bankruptcy filings that sparked the fresh questions into Chalopin’s 2020 purchase of Farmington State Bank.

The tiny community bank founded Moonstone Bank earlier this year, just days before it received a $11.5 million capital investment from Bankman-Fried’s Alameda Research.

In a news release, Moonstone announced the investment on March 7.

Chalopin, the bank owner, said in the release that the Alameda investment “signifies the recognition, by one of the world’s most innovative financial leaders, of the value of what we are aiming to achieve. This marks a new step into building the future of banking.”

In an unnamed statement this week, Moonstone Bank defended its acceptance of the Alameda funds without explaining why one of the largest cryptocurrency trading companies in the world wanted to invest in the tiny bank.

“Unfortunately, the unexpected collapse of this company negatively impacted countless individual investors, investment firms, vendors, counterparties and unfairly affected … Moonstone Bank’s reputation as well,” the statement reads.

State regulators were aware of Alameda Research’s investment into Moonstone when it occurred, said Roberta Hollinshead, director of banks for the state Department of Financial Institutions.

“We are actively overseeing the institutions in the state, particularly one building a new business model,” Hollinshead said. “We were aware of the investment. It wasn’t something we had to approve.”

Because the $11.5 million investment was less than 10% of the bank’s holdings, it did not trigger a new layer of regulation, she said.

“That is what we consider a passive-minority owner with Jean Chalopin owning the remainder,” she said. “There was no change in control. It didn’t require approval by the regulators.”

As for any business model that would include cryptocurrency, Moonstone Bank would face new scrutiny, she said.

“For them to do anything crypto-related, that would require regulator approval,” she said.

Federal regulations do not prevent banks from investing in cryptocurrency-related businesses, though federal guidelines generally prohibit them from using FDIC-backed funds to trade in cryptocurrencies.

Eric Kollig, spokesman for the U.S. Federal Reserve in Washington, D.C., said he could not comment about the process that federal regulators undertook to approve Chalopin’s purchase of the charter of Farmington State Bank in 2020.

Kollig forwarded a notice sent out by the Federal Reserve on Aug. 16, warning banking institutions about the volatility of crypto-related investments.

“The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may also pose risks related to safety and soundness, consumer protection, and financial stability,” the statement read.

Hollinshead, the state’s director of banks, also said she had no concerns with Vincent joining Moonstone Bank just a year after leaving DFI, and only two years after the agency approved the charter purchase by Chalopin.

“This was an application that was processed entirely by the Division of Banks without involvement of Joe Vincent,” Hollinshead said. “Joe was not involved at all in the approval of that change of control.”

She noted that Farmington State Bank remains “well capitalized,” meaning that it has funds to back up its clients’ accounts. She said Farmington’s customers should not worry about the future of the small bank.

Asked whether she had concerns about Chalopin’s connections to Deltec and FTX in the Bahamas, Hollinshead said she did not.

“The surprise was the swift fall of FTX,” she said. “That’s the real story that continues to unfold.”

In its statement, Moonstone Bank said it has no connection with Deltec, even though the companies share the same owner – Chalopin.

Hollinshead said the state closely monitors banking investments and proposed changes in charters, which always require both state and federal approvals.

“We do have banks that are trying to be innovative and forward-looking, and partnering with innovative funds,” she said. “But nothing looks exactly like this.”

This story has been modified from an earlier version.