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A Small Bank Gave Bitcoin to Its Entire Staff. Now It’s Taking Crypto Clients (#GotBitcoin?)

A small bank in New York City has started doing business with cryptocurrency firms, joining the very short list of U.S. financial institutions to embrace the sector. A Small Bank Gave Bitcoin to Its Entire Staff. Now It’s Taking Crypto Clients (#GotBitcoin?)

Quontic Bank opened a checking account for a bitcoin ATM company a few weeks ago and is in the process of completing a contract to deliver banking services to another crypto startup. The bank wouldn’t name either client.

“We’re just taking steps so that when the regulatory environment becomes more crypto-friendly, we don’t have a lot of catching up to do,” said Quontic chief executive Steven Schnall, who acquired the bank in 2009. “We’re looking to diversify our product offering and our customer mix by entering into that field.”

While Schnall wouldn’t say how big he wants Quontic’s crypto business to be, he claimed the pending contract “could impact millions of Americans.”

Crypto-friendly banks are extremely rare, in part because of the extra work they have to do complying with know-your-customer (KYC) and anti-money laundering (AML) regulations.

“Banks and other financial institutions have to look out for any suspicious activity,” said Joshua Klayman, head of the blockchain and digital assets practice at law firm Linklaters. “If you have a startup that raised money doing an ICO and didn’t do proper KYC or AML, that bank doesn’t know who the proceeds are from.”

The handful of U.S. banks willing to serve the sector includes Silvergate in California and Signature and Metropolitan Commercial in New York.

Like those institutions, Quontic is a relative pipsqueak in the banking industry. With $420 million in assets, it is only 0.015 percent the size of JPMorgan.

Yet Quontic stands out because its leaders caught the crypto bug early on.

Students of Crypto

Schnall, a longtime mortgage lender, became interested in bitcoin when it was worth less than $1, bought his first bitcoin at $75 in 2013 and lost 500 BTC in the Mt Gox debacle.

Patrick Sells, now the bank’s chief innovation officer, said Schnall began to educate him on bitcoin the first few times they met, while Sells was doing mortgage lead generation for Quontic through his own firm.

To learn more about the mechanics of cryptocurrency, Schnall and Sells built an ethereum mining operation, independent from Quontic, in January 2018. (Schnall said he is now more bullish on bitcoin than any other cryptocurrency.)

The two executives even came close to launching their own cryptocurrency, also separate from the bank, called QCoin. They lined up $2.5 million for an initial coin offering (ICO) but called it off after the market crashed.

Undeterred by the ups and downs, the bankers said that they believe banking and crypto can have a symbiotic relationship and are exploring what steps toward that goal might look like under the U.S. regulatory framework.

The bankers helped educate their staff of 180 by giving them each $20 in bitcoin when the price of bitcoin was around $3,000, and they’re looking to hire employees with experience in cryptocurrency.

“We can teach them the banking side,” said Sells, vaping in a white v-neck and jeans at Quontic’s Manhattan headquarters. “It’s easier to do that than vice versa.”

Highly Selective

While the bank wants to let cryptocurrency companies know that it’s open to banking them, Quontic said it has high standards for crypto customers.

When the bitcoin ATM network approached Quontic a year ago, the company was not prepared for the bank’s compliance vetting.

It didn’t have a disaster recovery plan, it was not properly tracking the currency transaction reports (CTRs) filed to regulators, and the company’s reporting was not up to Quontic’s standards.

After working closely with the bank for a year, the company opened an account at Quontic a few weeks ago.

To Schnall, such professionalism is necessary for crypto startups to be taken seriously.

“You don’t have mom-and-pop financial institutions. You’re not going to have mom-and-pop crypto players of any significance,” Schnall said. “Crypto companies have to have strong controls, internal audit, and a very robust system of compliance.”

Additionally, the juice has to be worth the squeeze for Quontic to bank a crypto firm.

“There must also be a strong strategic motivation for us as well – such as meaningful deposit balances, etc.” Schnall said. “‘Meaningful’ is relative to how complex, risk-laden and labor-intensive the account will be.”

Updated: 8-18-2019

Silvergate Bank Plans To Offer Cryptocurrency-Collateralized Loans

The holding company of cryptocurrency-friendly Silvergate Bank, Silvergate Capital Corporation, announced that the firm plans to offer cryptocurrency-collateralized loans.

In an S1/A form filed with the United States Securities and Exchange Commission on Aug. 15 the bank notes:

“We believe there may be attractive opportunities to provide digital currency borrowing facilities to deepen our high quality customer relationships and further enhance our interest income.”

In the document, the firm states that it found significant demand for cryptocurrency-related borrowing. The service would consist of the client providing crypto assets or U.S. dollars as collateral in exchange for significantly greater credit.

The bank would then “set a conservative aggregate lending amount to refine the product, and will develop a risk framework to minimize risk and further develop lending models over time.”

The company stated that it anticipates to offer the crypto-related credit product to institutional clients later this year. Silvergate also notes that it found significant desire from its clients for the bank “to be involved in the custody and transfer of digital assets between customers.”

Owler estimates Silvergate Bank’s annual revenue to be $30 million.

As Cointelegraph reported in March, Silvergate Bank signed on a slew of new cryptocurrency customers including cryptocurrency exchanges and miners, custodians and global investors, among others in the fourth quarter of 2018.

In 2018, Silvergate’s deposits derived from cryptocurrency customers reportedly increased by $150.4 million, or around 11.4%.

Updated: 8-27-2019

Winklevoss Twins’ Gemini Exchange Joins Silvergate Crypto Lending Network 

Gemini, a cryptocurrency exchange co-founded by Tyler and Cameron Winklevoss, announced it will join the crypto-lending Silvergate Exchange Network (SEN).

Through the network, Gemini’s institutional clients are now able to transact in U.S. dollars “24 hours a day, 7 days a week, and 365 days a year,” according to a statement made Aug. 27. This activity was previously prohibited by the traditional hours of operation for banks, which “shackled” fiat withdrawals and deposits.

By integrating with the cloud-based SEN API, the exchange can form counterparty relationships with other members of the network to make instantaneous transfers. Silvergate Bank, an industry financial service provider, supports the network of digital currency exchanges and digital currency investors, to facilitate the movement of U.S. dollars between participants.

According To The Bank’s Form S-1 filing:

“The SEN has a powerful network effect that makes it more valuable as participants and utilization increase, leading to 374% growth in SEN transaction volumes in the first six months of 2019 compared to the first six months of 2018.”

The SEN launched in early 2018 and has since enrolled approximately 77 percent of Silvergate’s eligible commercial clients.

Silvergate serves some of the cryptocurrency industry’s biggest firms including Coinbase, Bitstamp, Genesis Trading and Blocktower Capital.

Updated: 11-7-2019

Crypto-Friendly Silvergate Bank Goes Public on New York Stock Exchange

Silvergate Bank, a crypto-friendly bank, officially began selling shares on the New York Stock Exchange Thursday.

Roughly a year after it first filed for its initial public offering, Silvergate began its “IPO day” on the NYSE, according to the stock exchange’s Twitter account. The news comes a day after Silvergate received a “notice of effectiveness” from the U.S. Securities and Exchange Commission, indicating its long-running IPO bid had been accepted.

The bank currently serves more than 750 firms in the crypto space, including exchanges, investors and others, according to an updated IPO prospectus filed in September 2019.

This is up significantly from the 542 clients it reported in March 2019. At the time, while the bank saw its client base grow between November 2018 and March 2019, the assets it held shrank marginally, falling from nearly $1.6 billion to $1.5 billion in the last quarter of 2018.

In September’s filing, these numbers grew again, holding $1.55 billion in deposits.

SIlvergate priced its stock pricing at $12 per share on Nov. 6, and is planning to offer 3,333,333 shares of Class A common stock. Just under 1 million of these shares are being offered directly by Silvergate, while shareholders are offering the other 2.5 million, according to a press release.

These numbers are more conservative than an updated S1 filing dated late October 2019, where the company priced each share at a maximum of $15 and sought to raise roughly $65 million overall. If it sells the 3.3 million shares for $12 each, the company will more likely raise approximately $40 million.

The bank is hoping to sell these shares under the “SI” ticker by Nov. 12.

Silvergate could not be immediately reached for comment.

Updated: 11-7-2019

Crypto Exchange Boosts US Push With Silvergate’s Payment Network

U.K.-based cryptocurrency exchange has joined the Silvergate Exchange Network (SEN), the payment rail connecting major customers of Silvergate, the go-to bank of the crypto space.

In an interview with CoinDesk, Steve Gregory, chief compliance officer and corporate counsel of Corp, called Silvergate “the gold standard” when it comes to U.S. crypto compliance, and said joining SEN meant being included in a kind of institutional crypto “club”.

By participating in SEN, is connected directly to big institutional crypto players like Coinbase Prime, Cumberland, Kraken OTC, BitStamp, Jump and Circle, to name a few., which began offering services to US customers in 2015, established a headquarters in Jersey City, NJ, and now holds some 17 state licenses to operate its exchange. The company has 250 staff and operates in 180 countries.

Gregory was formerly a compliance officer at Gemini, the New York Department of Financial Services (NYDFS)-regulated exchange founded by Tyler and Cameron Winklevoss, which also recently joined SEN.

He Told CoinDesk:

“We are in the club now. Silvergate is the biggest bank in the space and with the SEN and we can facilitate trades to some of those larger institutions that are members.”

SEN provides Silvergate’s large institutional clients an instant fiat payment rail, 24 hours a day, seven days a week. This means if a proprietary trading house such as Cumberland, for example, wants to move a few million dollars to, this can be done without using a wire transfer.

Silvergate’s internal online banking uses an API to transfer the funds instantly on an internal ledger. “Instead of doing a wire and then a wall to wall transaction, we can just have Silvergate move our balance of USD,” Gregory said.

Although there is no hard data on how many firms are in the SEN and regularly using its internal payment rail (Silvergate is currently in an IPO quiet period and unable to comment), users of the service say the number of transactions is significant.

Removing counterparty risk from OTC crypto trades and enabling them to be always on is a good idea, which is also being explored by the likes of BitGo and OTC desk Genesis, as well as Kingdom Trust and trading firm OTCXN.

US Plans

There’s a short list of banks that will handle crypto companies. US also recently became a customer of Nevada-licensed trust company Prime Trust, which now provides the fiat on-ramp and banking relationship for Binance U.S. Signature Bank is another popular crypto bank, which CEX has worked with.

“Signature Bank has been great to us and has been efficient and seamless to work with,” said Gregory. “Signature does have the unfortunate limitation that they cannot process retail wire and ACH transfers under $50,000 without batching the transactions.”

Based on this limitation, he said “will use Silvergate for retail, under $50,000, ACH and wire deposits or withdrawals.”

In addition to the 16 or so U.S. states that don’t require a license, has acquired licenses to operate in: Alaska, Florida, Georgia, Iowa, Kansas, Maryland, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, South Dakota, Vermont, and West Virginia.

The firm applied for a BitLicense in the spring and held initial meetings with the NYDFS, said Gregory. A spokesman added that the anticipated approval would be “in a few months from the NYDFS which administers the Bitlicense and the New York Money Transmitter License.”

Speaking to the “high barrier to entry” when setting up shop in the U.S, Gregory pointed out that setting up surety bonds in order to operate in each state is expensive, especially while having to wait to get a license application looked at, concluding:

“It makes it tough to disrupt some of the bigger exchanges that are already established.”

Updated: 11-21-2019

Silvergate Bank CEO Bets On Higher Crypto Price Volatility After $40M IPO

Crypto-friendly Silvergate Bank is spending cash from its initial public offering this month to expand its offerings, anticipating higher cryptocurrency price volatility will fuel rising trading volumes and deposits.

In an interview, Silvergate CEO Alan Lane said the IPO is providing fresh capital for new products to meet the rising demand from institutions for full cryptocurrency lending and deposit solutions.

Lane said that greater price volatility could bring more price differentials and profit opportunities to crypto markets. That would lead traders to increase dollar deposits with Silvergate.

“We don’t predict when it will happen but we know that there might be an additional period where the volatility drives up volumes, and want to make sure that we can help our customers when that happens,” he said.

One potential catalyst could be the bitcoin block reward getting cut in half in the next year, Lane said, with the idea that a decrease of new supply could boost the price. Other events might include regulatory approval of exchange-traded funds for crypto, hard forks that create new breakaway currencies such as bitcoin cash, or high-profile hacks of crypto exchanges that affect sentiment.

“In our experience, it’s not so much about the absolute price of the asset, but rather the volatility in the price where we actually see potential changes in the behavior of some of our customers,” Lane said.

Expanding Product Line

The California-based commercial bank plans to launch a cryptocurrency lending product in the fourth quarter and settlement and custody services for fiat currencies and digital assets by June 2020 at the latest.

Two of its biggest profit generators are transaction fees from trading and yields on the investments it makes using client deposits, Lane said, with the fresh capital offsetting its investment in new products for those areas.

The new lending product, set to be launched in fourth quarter 2019, would be part of the Silvergate Exchange Network (SEN) – a payment system designed for crypto exchanges and their big clients to transfer funds in the network.

It would enable clients to borrow fiat currencies from the bank using bitcoin holdings as collateral, according to Lane.

The bank decided to add the settlement and custody services within six months after launching the lending product because of the growing demand from its client base, he said.

“We’ve already been working with the New York DFS, and submitted an application with them to form a New York licensed trust company for our settlement and custody services,” Lane said. Other New York-chartered trust companies in the crypto market include Coinbase, Gemini, Paxos, Bakkt and Fidelity Digital Asset Services.

Overall, Silvergate is among a very short list of U.S. financial institutions that are banking crypto institutions. They include Metropolitan Commercial Bank, Signature Bank, and Cross River Bank.

Silvergate’s clientele is approximately 60 percent U.S. and 40 percent international entities, Lane said.

Banking Basics

Silvergate Bank was formed as a traditional commercial bank in Southern California in 1988, but started pivoting in 2013 to serve crypto exchanges, startups and institutional investors.

Lane said that the decision to enter the crypto market was simple: “Our loans were growing faster than our deposits, we were just looking for other sources of deposits.”

He said that today its balance sheet is still deep enough to support much more loan volume from crypto customers.

The bank doubled deposits in 2017 and more than tripled the client base since it started banking crypto-related businesses, according to its IPO filing.

Prior to the IPO, Silvergate had raised $114 million through a private placement in February 2018. Nine months later, Silvergate agreed to sell its San Marcos, CA, retail branch and its business lending team to Seattle-based commercial bank HomeStreet.

That sale, completed in March 2019, included the reduction of $115.4 million in loans and $74.5 million in deposits, but resulted in a pre-tax gain of $5.5 million, according to the IPO filing.

Lane said the deal was part of the bank’s effort to shift more toward its crypto businesses, as well as pay for investments to bolster that side.

“We’re essentially bringing the legacy banking system that only operates 40 hours a week during business hours into the 24/7 crypto markets that never sleep,” he said.

Silvergate Bank listed its shares on the New York Stock Exchange under the trading symbol SI, via a $40 million initial public offering on Nov. 7.

The bank completed its IPO on Nov. 12, raising approximately $10 million from issuing 824,605 common shares, while existing shareholders reaped $30 million from selling 2.5 million of their shares.

The shareholders, which include Bankcap Partners, a Dallas, TX,-based private equity firm and Park West Asset Management, may exercise a greenshoe option to sell up to 499,999 additional shares in November, according to the IPO filing.

Silvergate Bank’s shares debuted at $12 on the NYSE and were trading at $16.35 on Wednesday, valuing the company at $319 million.

“We know that the last time there was a big bull market in crypto, our deposits surged and that’s part of the reason to go public, in case we have another big growth spurt and we need capital,” Lane said. “Now that we’re public, we have more efficient access to capital to support our growth.”

Updated: 11-28-2019

Kraken, One of Oldest Bitcoin Exchanges, Joins Silvergate Exchange Network

Kraken, one of the largest and oldest Bitcoin (BTC) exchanges in the world, has joined the Silvergate Exchange Network (SEN). By joining SEN, the United States-based cryptocurrency exchange enables its clients to deposit and withdraw U.S. dollars from Silvergate accounts with no fees, the firm announced Nov. 27.

According to the announcement, the depositing process will be different based on whether Kraken users have a Silvergate account. If they have an account at Silvergate, Kraken users will simply have to enable SEN funding on their Kraken account before using the option.

Those who do not have a Silvergate account will have to apply separately at bank.

Silvergate’s Crypto Client Base Continues To Grow

Silvergate Capital is a California-based commercial bank focused on digital currency businesses. The Silvergate’s SEN is a network of crypto exchanges and investors that enables transactions of U.S. dollars between SEN members.

As reported, Silvergate’s customers include crypto exchanges, miners and custodians, among others. The crypto-friendly bank saw its number of digital currency customers grow from 655 as of June 30, 2019 to 756 as of Sept. 30, 2019, as Silvergate stated in a filing with the U.S. Securities and Exchange Commission.

In August 2019, the SEN added another important crypto partner, the Winklevoss brothers-founded exchange Gemini, enabling faster transfers in U.S. dollars.

Earlier this month, Silvergate Bank launched its shares for trading on the New York Stock Exchange under the ticker NYSE:SI.

Updated: 12-11-2019

Elliptic Launches Tool To Connect Banks With Cryptocurrency Exchanges

London-based cryptocurrency compliance firm Elliptic has launched a new tool that allows banks to work more closely with crypto exchanges.

Dubbed Elliptic Discovery, the product collects detailed profiles of more than 200 global crypto exchanges to enable banks to manage risks associated with crypto transactions, Business Insider reports Dec. 11.
Elliptic Discovery includes data collected since 2013

Designed specifically for banks, Elliptic Discovery reportedly provides compliance teams with necessary insights to identify flows of funds on crypto assets and assess risks including money laundering. The tool is reportedly based on Elliptic’s data that was collected since 2013 and offers a wide range of identifiers and risk indicators in terms of exposure to crypto-assets through exchanges, the report notes.

James Smith, CEO and co-founder at Elliptic, noted that the new tool is created to address the existing lack of visibility into the crypto-asset ecosystem by banking institutions.

Banks’ lack of visibility to crypto ecosystem has caused “zero-tolerance”

According to Smith, this lack of access to the crypto industry has resulted in “zero-tolerance” to the new asset class and frustrated customers, while banks “have remained blind to the actual risks posed by their exposure to crypto-assets.”

Smith pointed out that there are different types of crypto currency exchanges, which would be taken into account by the banks while assessing the risks. He said:

“Elliptic Discovery changes that by enabling banks to shine a light on their customers’ crypto-asset activity and take a risk-based approach […] Not all crypto-asset exchanges are alike and Elliptic Discovery will allow banks to make this distinction and seize the opportunity to work more closely with these businesses, based on an evidence-based assessment of the risk.”

As the company has not specified what banks have already signed up for Discovery or expressed interest in doing so in the report, Cointelegraph has contacted Elliptic team for comment. This article will be updated pending any new information.

Elliptic Is A Partner Of Major Crypto Exchanges Such As Coinbase And Binance

Backed by Japanese banking giant SBI Group and Santander’s venture capital arm Santander InnoVentures, Elliptic is a major global crypto forensics and analysis firm. The company is known for providing its services to American crypto exchange Coinbase and has been a partner of Binance, one of the world’s biggest crypto exchanges, since May 2019. In November 2019, Elliptic issued a report tying about $400 million worth XRP tokens to illegal transactions.

Earlier this year, Elliptic refuted allegations that it was collecting and selling clients’ user data to third parties for financial gain.

Updated: 1-6-2020

Rivals Signature Bank and Prime Trust Team To Offer Instant Payments for Institutions

Crypto banking competitors Prime Trust and Signature Bank have partnered in a bid to appeal to institutional clients.

Signature announced Monday it would be linking its Signet payments platform to Prime Trust’s multi-asset settlement platform, creating a new service offering “real-time” settlements for digital asset trades.

“Any Signature Bank commercial client participating on the Signet platform has the ability to make instantaneous payments in U.S. dollars, any time without transaction fees,” said Joseph DePaolo, Signature Bank president and CEO in a press release. “The relationship we have forged with Prime Trust will allow their clients to immediately settle their transactions through the revolutionary Signet platform.”

The service will allow institutional clients from both companies to make payments directly to one another at any time, without third parties or transaction fees.

The Signet system launched in December 2018 after winning approval from the New York State Department of Financial Services (NYDFS). It opened to Signature’s commercial clients, who need a minimum account balance of $250,000, on Jan. 1, 2019. By February, the bank already claimed to have on-boarded more than 100 clients who were sending each other millions of dollars in crypto transactions daily.

State-licensed trust company Prime Trust launched its settlement network back in July as an alternative to Signature. Having generally attracted an exchange clientele, including Bittrex and Huobi, it is the only publicly known financial services provider for Binance.US, Binance’s American partner company.

The list of banks willing to work with cryptocurrency companies remains short over compliance and risk concerns. Hence, market share is mostly concentrated in a handful of specialized providers at which competition is heating up.

The cryptocurrency exchange, which uses Signature Bank, moved some of its retail and smaller payment operations to rival banking provider Silvergate back in November. Prime Trust dropped custodial fees to zero last January, undercutting most of its rivals that charge between four and 10 basis points per month.

Updated: 1-28-2020

Crypto-Related Deposits Drop by Half At Metropolitan Commercial Bank

Metropolitan Commercial Bank’s deposits from digital currency businesses have steadily declined for more than a year, a sign competition is heating up in a field where the bank was once one of the only games in town.

Over the course of 2018, the New York-based lender’s deposits from the industry shrank by 52 percent, to $104 million on Dec. 31, according to an investor presentation the bank put out last week. Digital currency clients accounted for 4 percent of the bank’s total deposits at year’s end, down from 13 percent a year earlier.

Metropolitan is one of a handful of banks that openly services the sector. In the presentation, the bank still advertises a diverse set of global payment clients including crypto payments processor Bitpay, crypto-asset platform, crypto exchange Coinbase and crypto brokerage Voyager. But the business is well off from its peak in the second quarter of 2018 when Metropolitan’s deposits from digital currency firms averaged $369 million.

While that decline may partly reflect the 2018-2019 crypto bear market, it also suggests the bank faces stiffer competition in a field where most financial institutions have historically feared to tread.

At Metropolitan’s rival Silvergate Bank, for example, crypto deposits declined at a slower rate, just 22 percent on a year-over-year basis, to $1.29 billion on Sept. 30, the most recent date for which figures are available. Over the same 12-month period, the La Jolla, Calif.-based bank’s crypto clientele increased by 273 firms to 756 in total, and they account for 70 percent of its $1.8 billion of deposits.

Silvergate, which went public last year, is set to report fourth-quarter results Wednesday.

A few players have entered the market for banking crypto businesses in the last year, such as Massachusetts-based Provident Bank and Quontic in New York.

Rather than fight to retain deposits, Metropolitan was likely content to let some of this business go, said Christopher O’Connell, a bank stock analyst at investment firm Keefe, Bruyette & Woods.

“As more [bank] competitors get into the space, some of the overall fee rates that they can charge have changed,” O’Connell said. “Since they have a solid [deposit] pipeline … the bank may not want to pay for a larger portion of this business.”

Revenue from digital currency customers has steadily hovered around 1 percent of Metropolitan’s total ever since foreign exchange conversion and cash management fees from the sector spiked in Q4 2017 and Q1 2018, said O’Connell. That period coincided with the peak of the last crypto bull market.

Metropolitan declined to comment. In its fourth-quarter earnings release, the bank pointed to a decrease in fees from digital currency customers when explaining why non-interest income had decreased by $1.5 million for the full year compared to 2018.

Updated: 1-29-2020

Silvergate Bank Adds 48 Crypto Clients In Q4 Even As Deposits Slip 4%

Silvergate Bank, one of the few U.S. banks openly serving crypto-related businesses, added more crypto clients in the fourth quarter of 2019 but saw deposits and fee income from those clients drop.

The La Jolla, Calif.-based bank, which went public on the New York Stock Exchange under the trading symbol SI in November, released its earnings report before the market open on Wednesday.

The report lists a 4 percent decrease in deposits from the crypto industry despite the addition of 48 crypto clients. The commercial bank’s overall deposits decreased by 1.8 percent in the same quarter (Silvergate also serves non-crypto businesses).

In a press release, CEO Alan Lane attributed these new clients to the growth of the Silvergate Exchange Network (SEN), which allows commercial customers to instantly move U.S. dollars between different crypto exchanges. SEN transactions topped 14,400 in the fourth quarter, a 17 percent increase from Q3 2019.

The cost of deposits for the bank, which holds $2.1 billion in assets, increased from 0.5 percent to 0.84 percent. The bank earned $1.4 million in fee income from its crypto customers, down 12.5 percent from $1.6 million last quarter.

The bank added 11 digital currency exchanges (including over-the-counter trading desks), 21 institutional investors and 16 crypto businesses (i.e. mining operations or crypto application companies).

Silvergate’s net income decreased by around 45 percent, from $6.6 million in the third quarter to $3.6 million.

In 2013, Silvergate pivoted from traditional commercial banking to serving the cryptocurrency community as a rich resource of non-interest bearing deposits. The bank then converts these deposits into interest-bearing deposits at other banks, investment securities and loans.

Earlier this month, Silvergate launched the SEN Leverage product, which allows proprietary traders to put up bitcoin as collateral for fiat loans that they can then use to buy more bitcoin, similar to margin lending in the traditional markets.

Silvergate also made its first hire directly from the crypto industry, bringing on former Blockstream exec Benjamin Richman as director of digital currency.

Updated: 1-31-2020

Few Banks Will Touch Crypto Firms, But Silvergate Wants To Touch Bitcoin Itself

Silvergate Bank is venturing even further into a field where few financial institutions dare to tiptoe.

The La Jolla, Calif., lender made a name 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 on its roadmap yet, it has applied for the New York trust license with the aim of providing custody and settlement for crypto. One example of this might look like “providing settlement services for their bitcoin trades,” Silvergate CEO Alan J. Lane 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 allows commercial customers to instantly move U.S. dollars between crypto exchanges.

“In order for us to be able to be that trusted intermediary, we have to be able to touch the digital assets ourselves,” Lane said. “Think about it as if Silvergate also had the ability to be the SEN for bitcoin.”

The service, almost certainly the first of its kind offered by a U.S. commercial 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 ready to be in the business, and part of the reason is because this doesn’t exist,” Lane said, emphasizing the bank doesn’t yet have a product in mind to solve the problem. “Our current customers, they’ve already figured out a way to get 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 way to settle.”

Lane spoke to CoinDesk Thursday after Silvergate’s first conference call as a publicly traded company. Earlier in the day it had reported fourth-quarter results, including a 6 percent increase in crypto clients and a 4 percent decrease in deposits from those clients.

Coming Soon

Silvergate Bank’s 2020 will be characterized by staff getting the bank’s bitcoin-collateralized margin lending running well and solving other pain points in the digital asset industry, Lane said.

Salary expenses climbed nearly 6 percent from a year earlier to $8.7 million in the fourth quarter. The majority of this went toward customer service and software engineers, Lane said when asked what share of the expenses was from compliance costs.

The bank does spend money on compliance, of course: Silvergate uses both Chainalysis and Elliptic, Lane said. These vendors analyze the public blockchains to flag suspicious activity, which banks are required under Federal Reserve regulations to report.

With $2.1 billion in assets, Silvergate is a relatively small institution, 0.07 percent the size of JPMorgan. The asset side of its balance sheet looks like a traditional community lender, composed mainly of real estate loans. But that may 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 put up bitcoin as collateral for fiat loans they can then use to buy more bitcoin.

Since the 90-to-180-day pilot will include only SEN participants, the bank will be able to monitor SEN Leverage loans more closely than it could other types of loans.

“We will be able to monitor the loan, the collateral underlying the loan and the balance of the loan, 24 hours a day, seven days a week,” Lane said. “We’ll be able to monitor this much more closely than we can monitor just about any other loan we make.”

In response to questions from analysts in the company’s earnings call about yield on SEN loans, Lane said, “The way we’ve thought about this initially is this would likely be a high single-digit type of cost to the borrower.”

In the interview, Lane emphasized the bank wouldn’t take advantage of crypto customers on SEN loans just because other banks aren’t offering the same product. “We’re certainly not going to poke their eyes out on what we’re charging them,” Lane said.

Silvergate is also working to increase the number of fiat currencies it supports for foreign exchange transactions on the SEN to include at least the top 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 love to have the SEN for the euro and the SEN for the yen,’” Lane said. “That involves having correspondent banking relationships with banks in those areas where those currencies are predominant and then being able to create a similar type of network as to what we’ve created with the SEN.”

Dry Powder

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 need arise.

Currently, Silvergate has a 10.5 percent leverage ratio, meaning the bank has more than twice the amount of capital required by banking regulators (5 percent).

“On that metric alone, we could double the size of the bank and not run out of capital,” Lane said. “That’s just one metric, and I’m not suggesting we would do that … but if we saw that leverage ratio going down to 8 percent, we would look to raise additional capital.”

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