The California Community Bank’s gamble on cryptocurrencies pays off

The California Community Bank's gamble on cryptocurrencies pays off

While regulators and even some banks remain skeptical about the security and business potential of crypto, Silvergate is honing a specialty that other banks have tried to mimic. Both exchanges and institutional investor companies use the bank’s Silvergate Exhange Network, which allows the buying and selling of bitcoin at night and on weekends when normal payment rails like the automated clearing house and FedWire are off.

The $12 billion-asset bank in La Jolla, California, provides an alternative payment rail to facilitate transactions between institutional investors and crypto exchanges such as Coinbase, Kraken, Gemini and Bitstamp. Silvergate also enables stablecoin issuers to mint their digital currency.

Highlights

  • “I’ve drunk the Kool-Aid as it relates to bitcoin and decentralization and all of that,” Lane said in an interview. “I believe that this is a better financial future for our kids and grandkids. … I want to leave them not only with a healthy planet, but also with a healthy financial system. And I think that bitcoin can help with that.”

  • Silvergate Bank CEO Alan Lane says he has become a convert to the power of cryptocurrencies to disrupt the financial system in a good way.

In the second quarter, total volume of dollar transfers over the Silvergate Exchange Network increased 44% from the prior quarter, from $167 billion to $240 billion. This was up 968% over the same quarter in 2020.

Silvergate’s strong second-quarter results, growing customer list and selection to issue Diem — the digital currency originally known as Facebook’s Libra — are signs that the community bank’s pivot into cryptocurrency is working.

The number of Silvergate’s digital currency customers grew to 1,224 in the second quarter, compared to 1,104 in the first quarter and 881 in June 2020. Digital currency customer deposits grew by $4.3 billion to $11.1 billion as of June 30, 2021, compared to $6.8 billion as of March 31, 2021. Overall assets and deposits have seen strong growth over the past year, largely as a result of bitcoin-related business.

Analysts said Silvergate’s strong second-quarter performance coupled with the decline in bitcoin’s value showed the resiliency of its business model.

“I absolutely believe that this is a first mover and it’s an industry leader in what it’s going after,” said Michael Del Grosso, research analyst at Compass Point Research & Trading in Miami. A few new entrants have tried to follow the lead of what Silvergate has built, including Signature Bank with its blockchain-based digital payments platform Signet, and BankProv with ProvXchange, which lets clients exchange money with each other in real-time without the delays of traditional payment rails.

“But right now, at least in terms of what they’re building for digital currency-focused hedge funds, for exchanges, for stablecoin providers, in network terms, Silvergate is the Visa of the space,” Del Grosso said. Despite the strong quarter, the number of crypto transactions facilitated on the bank’s network actually decreased by 17%, from 166,772 transactions in the first quarter to 137,947 transactions in the second quarter. This was still an increase of 242% from the 40,286 transactions handled in the second quarter of 2020.

Lane says the decrease in transactions was caused by the drop in the price of bitcoin in the second half of the quarter, especially in June. Many institutional customers sold down their positions and went to cash, or moved dollars around the system, he said. “They were doing fewer transactions on a daily basis, but those transactions were bigger in dollars,” Lane said.

Lane joined the bank in December 2008, during the financial crisis and just before the first bitcoin block was mined in January 2009. The bank had $280 million of assets and 40 employees. Before joining Silvergate, Lane was president and chief operating officer at Southwest Community Bank in San Diego. Prior to that, he was CEO of Business Bank of California.

Silvergate Bank opened in 1988 as a state-chartered industrial loan company, affording it backing from the Federal Deposit Insurance Corp. ILC origins