Few Banks Will Touch Crypto Firms, but Silvergate Wants to the touch Bitcoin Itself
The La Jolla, Calif., lender made a reputation for itself providing hard-to-come-by U.S.-dollar banking services for businesses that deal in cryptocurrency. But now Silvergate wants to handle digital assets themselves.
While the bank has no such services in its roadmap yet, it's applied for the ny trust license with the aim of providing custody and settlement for crypto. One example of this might appear as if “providing settlement services for his or her bitcoin trades,” Silvergate CEO Alan said.
In this scenario, Silvergate would be the intermediary ensuring settlement of a fiat-for-bitcoin exchange between two participants on its Silvergate Exchange Network (SEN), a payments platform that permits commercial customers to instantly move U.S. dollars between crypto exchanges.
"In order for us to be ready to be that trusted intermediary, we've to be ready to touch the digital assets ourselves,” Lane said. then believe it as if Silvergate also has the power to be the SEN for bitcoin."
The service, almost certainly the primary of its kind offered by a U.S. full service bank , wouldn’t apply to retail investors or institutional investors that are already comfortable with bitcoin as an asset class.
“It’s folks that aren’t quite able to be within the business, and a part of the rationale is because this doesn’t exist,” Lane said, emphasizing that the bank doesn’t yet have a product in mind to unravel the matter . “Our current customers, they’ve already found out how to urge comfortable with this, but they tell us there are other counterparties out there that they’re not yet doing business with because they don’t have a trusted thanks to settle.”
Lane spoke to CoinDesk Thursday after Silvergate’s first call as a publicly-traded company. Earlier within the day it had reported four-quarter results, including a 6 percent increase in crypto clients and a 4 percent decrease in deposits from those clients.
Silvergate Bank’s 2020 are going to be characterized by staff getting the bank’s bitcoin-collateralized margin lending running well and solving other pain points within the digital asset industry, Lane said.
Salary expenses climbed nearly 6 percent from a year earlier to $8.7 million within the fourth quarter. the bulk of this went toward customer service and software engineers, Lane said when asked what share of the expenses was from compliance costs.
It does spend money on compliance, of course: Silvergate uses both Chainalysis and Elliptic, Lane said. These vendors analyze the general public blockchains to flag suspicious activity, which banks are required under regulations to report.
With $2.1 billion in assets, Silvergate may be a relatively small institution, 0.07 percent the dimensions of JPMorgan. The asset side of its record seems like a standard community lender, composed mainly of land loans. But which will start to evolve soon.
In the immediate future, Silvergate's biggest focus is its pilot of the SEN Leverage product, which allows proprietary traders to place up bitcoin as collateral for fiat loans that they will then use to shop for more bitcoin.
Since the 90-to-180-day pilot will include only SEN participants, the bank are going to be ready to monitor SEN Leverage loans more closely than they might other sorts of loans.
“We are going to be ready to monitor the loan, the collateral underlying the loan and therefore the balance of the loan, 24 hours each day , seven days every week ,” Lane said. “We’ll be ready to monitor this far more closely than we will monitor almost the other loan we make.”
In response to questions from analysts within the company’s earnings call about yield on SEN loans, Lane said, “The way we’ve considered this initially is that this would likely be a high single-digit sort of cost to the borrower.”
In an interview, Lane emphasized that the bank wouldn’t cash in of crypto customers on SEN loans simply because other banks aren’t offering an equivalent product. “We’re never getting to poke their eyes out on what we’re charging them,” Lane said.
Silvergate is additionally working to extend the amount of fiat currencies it supports for exchange transactions on the SEN to incorporate a minimum of the highest five to 10 major global currencies. From fourth-quarter 2018 to fourth-quarter 2019, volume on the SEN increased by 150 percent to an all-time high of 14,400 transactions handling $9.6 billion.
“Our customers are saying, ‘We’d like to have the SEN for the euro and therefore the SEN for the Yen,’” Lane said. “That involves having correspondent banking relationships with banks in those areas where those currencies are predominant then having the ability to make an identical sort of network on what we’ve created with the SEN.”
Taking Silvergate public has given the crypto industry a clearer window into the bank's business. It also positions Silvergate to more easily raise capital should the necessity arise.
Currently, Silvergate features a 10.5 percent leverage ratio, meaning the bank has quite twice the quantity of capital required by banking regulators (5 percent).
"On that metric alone, we could double the dimensions of the bank and not run out of capital," Lane said. "That's only one metric, and i am not suggesting we might do this … but if we saw that leverage ratio taking place to eight percent, we might look to boost additional capital."