CoinDesk 50: Silvergate – The Bank That Wasn’t Scared

Crypto’s first IPO was a 30-year-old bank.

Southern California’s Silvergate Bank, which went public in November 2019, is one of just a handful in the U.S. willing to bank cryptocurrency firms. Since November, it’s spent part of the $40 million from its initial public offering to create products to serve the industry as price volatility drives trading volumes and deposits. 

Founded in La Jolla, in 1988, the bank pivoted to crypto in 2013. At that time, the bank’s loans were growing faster than its deposits and it transitioned to accepting the crypto community’s excess fiat capital, which brings in a stream of non-interest bearing deposits. It then converts these deposits into interest-bearing deposits at other banks, investment securities and loans. 

The backstory gives Silvergate social capital among crypto companies. 

“The bank was among the first U.S. financial institutions to fully embrace the industry,” said Dave Ripley, COO of the Kraken cryptocurrency exchange. “Many U.S.-based crypto companies would have had significantly more difficulty operating without Silvergate’s services.”

Silvergate’s focus on becoming the premier bank for crypto exchanges and institutional investors is reflected in its balance sheet, said KBW analyst Mike Perito. Its risk-based asset ratio – total capital to risk-based assets – is around 26%, compared to 12% to 14% at other banks. Its leverage ratio – or the measure of a bank’s core capital to its total assets – is around 11%, against a more typical (and more risky) 9% or 9.5% at its peers, he said.

This conservatism gave the bank stability during the market crash in March, while it saw deposits and fee income rise after institutional investors dropped more excess cash into their accounts in the first quarter of 2020. 

The future of banking crypto

Having moved faster than any other U.S. bank in the space, Silvergate aims to stay ahead by creating products and services clients request. 

Through the Silvergate Exchange Network (SEN), which allows customers to instantly move dollars between different crypto exchanges and is open even on weekends, the bank is piloting new features such as bitcoin margin lending. The product is called SEN Leverage. 

“Their SEN is probably the most useful service that they offer and what sets them apart from every other bank,” said Michael Gilman, manager of treasury at MG Stover, a fund administration firm. “So giving their clients the ability to transact with other blockchain counterparties 24/7 is what separates from the pack.”

Without the SEN, crypto companies would be bound to the Fedwire system on which banks settle transactions. 

Silvergate’s clients have also expressed interest in custody and settlement services for bitcoin trades, CEO Alan Lane told CoinDesk after reporting earnings for the fourth quarter of 2019. 

Lane said the bank is exploring whether or not it should play a “more active role” in the stablecoin space, beyond just offering basic banking services to stablecoin issuers. When asked about how the Facebook-backed libra might benefit the bank, Ben Reynolds, executive vice president of corporate development, touted Silvergate cash management products that allow for the quick transfer of fiat to stablecoins. 

That could mean stablecoin products for larger customers. “If the history of banking tells you anything, people are willing to pay for a higher level of service, especially in the institutional segment,” Perito said.