Ultimate Resource For Crypto-Friendly Banks (#GotBitcoin?)
Silvergate Bank, a crypto-friendly bank, officially began selling shares on the New York Stock Exchange Thursday. Ultimate Resource For Crypto-Friendly Bank (#GotBitcoin?)
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.
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%.
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.
Crypto Exchange CEX.io Boosts US Push With Silvergate’s Payment Network
U.K.-based cryptocurrency exchange CEX.io 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 CEX.io 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, CEX.io is connected directly to big institutional crypto players like Coinbase Prime, Cumberland, Kraken OTC, BitStamp, Jump and Circle, to name a few.
CEX.io, 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 CEX.io, 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.
There’s a short list of banks that will handle crypto companies. CEX.io 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 CEX.io “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, CEX.io 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 CEX.io 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.”
Deposits at crypto-friendly Signature Bank grew by $4.11 billion, an 8% increase, in the third quarter of 2020. Over the past year, deposits have grown by $15.28 billion, or nearly a 40% increase, according to the bank’s earnings release. Signature reports $54.34 billion in total deposits. “Crypto firms are often a rich source of low-cost deposits for the few banks that openly serve the sector. As such, analysts have paid close attention to deposit growth at Signature, Silvergate Bank and Metropolitan Commercial Bank,” CoinDesk’s Nathan DiCamillo reports.
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.
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.”
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.
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.
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 CEX.io, 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.
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.com, 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.
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.
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.
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.”
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.”
Crypto Banks Answer the Call Amid Coronavirus-Fueled Economic Decline
The coronavirus pandemic is a make-or-break situation for crypto banks as many see opportunities despite the obvious setbacks.
As 2020 staggers on, the scourge of the coronavirus is showing no sign of relenting any time soon. Since the reality of the pandemic took hold, it has revealed itself to be a black swan the likes of which have never before been seen.
Cryptocurrencies suffer from volatility in the best of times, and markets have spent most of the last two years in the red. But companies, markets and entire economies all over the world are tanking. So, is cryptocurrency’s notorious Achilles’ heel affecting its banking and payments sector?
SoftBank Posts Hard Landing
There’s not a business in the entire world unaffected by the coronavirus. Never have companies been faced with such a sudden onslaught of unforeseen pressures, with supply chains interrupted and customers and employees alike locked down worldwide.
Crucially, many crypto firms are committed to decentralization, meaning that working from home has been a relatively easy shift. But some of the industry’s biggest names have been snarled up in the fallout from the coronavirus. SoftBank Group Corp., the parent company of Fortress Investment Group, is expected to rack up a $12.5 billion loss for the financial year that ended in March.
Founded by Masayoshi Son, a Korean-Japanese billionaire tech entrepreneur, investor and philanthropist, SoftBank Group Corp. is one of the most prominent crypto holding companies operating in Asia. But it appears that the Vision Fund, an investment fund in which SoftBank has a $33 billion stake, is proving to be a major drain on the company’s profits. The group announced that it was set to lose $17 billion after its fateful investment.
But this isn’t the first time that the bank’s CEO has been burned by crypto. Son allegedly lost $130 million after a poorly judged Bitcoin (BTC) investment. He reportedly bought in when crypto’s most famous token was soaring high back in 2017.
Galaxy Digital Fails To Shine
But SoftBank isn’t alone in struggling with its crypto-related business. With yet another net loss in the fourth quarter of 2019, it seems that Galaxy Digital’s stars are far from aligned. Galaxy Digital is a major cryptocurrency investment bank founded by ex-Goldman Sachs partner Mike Novogratz with the ambitious vision of institutionalizing the crypto industry.
The industry has seen a huge influx of institutional interest, varying from utility, to coins, to central bank digital currencies, but Galaxy Digital has struggled to balance its books, with nearly constant quarter-on-quarter losses.
As per an April 8 announcement, the company reported a net loss of $32.9 million in the fourth quarter of 2019, citing “realized loss on digital assets” and operating expenses as the reason for the loss. The disappointing financial results are the latest in a string of poor performances, with losses of $134 million and $68.2 million in the first quarter of 2018 and the third quarter of 2019, respectively. Despite the quarterly loss, Galaxy Digital reported that it had not been that badly affected by the coronavirus crash and has asked all employees to work remotely:
“Nonetheless, the Covid-19 pandemic has caused global economic uncertainty and is likely to impact the Company’s investments and business activities in the coming months, with offsetting potential benefits to the Company from increased volatility and expansive global monetary and fiscal policy.”
Despite the company’s claims of weathering the COVID-19 storm with relatively little turbulence, some reports have suggested that Galaxy Digital has cut its workforce by no less than 15% this year.
Is Crypto Banking Worse Off Than Traditional Banking?
Crypto markets are buffeted about by myriad factors, as well as deep philosophical divides. Regardless of whether or not the philosophical diversity of investors is a good thing, those who had hoped prices would skyrocket when traditional markets were in dire straits were left disappointed. So too were those who maintain crypto, notably Bitcoin, as a store of value above anything else.
Prices have crept up again, but they took a battering along with traditional markets in the initial stages of the pandemic’s unstoppable spread, leading some to argue that cryptocurrencies are now largely correlated assets. But the question of whether crypto banks are better or worse off in times of crisis has sparked debate among investors and observers alike.
Mathias Imbach, the co-founder of Sygnum — a major institutional crypto bank — and CEO of its Singapore branch, told Cointelegraph that instability equally affects both traditional financial markets and digital asset markets, but this does not necessarily have a uniquely negative effect:
“The fragility of the current system could also drive further interest in digital assets, which has historically demonstrated a low correlation to traditional asset classes (with the exclusion of immediate sell-offs during market shocks), and offers a potential hedge to financial markets. Empirical data from last month on our platform sustains this argument.”
Bill Zielke, the chief marketing officer of BitPay, a United States-based Bitcoin payment service provider, said that neither the nature of cryptocurrencies themselves nor the coronavirus were notably risky for the firm:
“We do understand that that crypto has a risk with price fluctuations, but BitPay’s business model is to remove that risk for merchants along with fraud and identity theft found with traditional credit cards. Merchants receive the full value of the purchase minus BitPay’s 1% fee.”
Crypto Banking: What’s The Impact?
Due to the uneven and rapid spread of the coronavirus around the world, businesses and governments alike have responded in different ways. One thing interesting to note is that crypto and blockchain businesses were often quick to implement protective measures. Many of the crypto conferences that took place around the world prior to the current state of the nearly global shutdown were marked by absences and low attendance, with travel bans being put in place and companies jumping to battle stations preemptively.
The digital asset bank Sygnum was one such company, telling Cointelegraph that management has put in place an action plan to protect employees and customers, stabilize operations, plan profit and loss scenarios, defend revenue loss driven by the macroenvironment, and plan potential cost takeouts to conserve cash.
Sygnum’s Imbach explained to Cointelegraph that, as the company operates in fully decentralized mode, it has been able to continue operations under lockdown conditions. Imbach said that since the crisis began, it has actually witnessed increased customer demand and has continued to launch new products:
“As a natively digital business we have been able to continue normal operations in decentralised mode, with our team across Switzerland and Singapore working remotely. We are still launching new products, and clients can onboard digitally or access our services through an e-banking portal.”
Monolith, a decentralized banking company based in the United Kingdom, is another company that is seeing the bright side of the rapidly developing financial crisis. A spokesperson for the company said that because this is not a traditional bear market, it is not witnessing the usual behavior. By offering a variety of digital assets, the spokesperson told Cointelegraph that crypto banks can keep investor capital flowing:
“Those who would typically hold, are now seeking more liquidity in their assets as a response to the unpredictable nature of a global systemic problem.
Where previously people would look to offset market collapse by committing to mainstream assets, the advent of more current solutions such as stable currencies offer them the hedge they want today using a reliable transacting finance facility.”
Like all unexpected, high-impact events, the coronavirus pandemic has left many businesses facing tough decisions. For some, this may mean closure, but Imbach says this difficult climate could serve as a catalyst for positive development in crypto finance:
“We believe COVID-19 brings challenges also for us, at the same time it also feels we’re witnessing a ‘fast forward’ mentality, more people thinking about the viability of today’s traditional financial system, many people reviewing their portfolio allocations etc.”
How Are Crypto Bank Customers Behaving?
Few investors are likely to have forgotten the chaos wrought across global stock exchanges only a few weeks ago. Headlines share the doomsaying prophecies of statisticians and economists about the prospects of many of the world’s most vital economies. But it seems that while many of the key token prices have taken a hammering, it’s not all doom and gloom as far as crypto banking is concerned.
Imbach told Cointelegraph that the nearly global work-from-home restrictions have actually led to an increase in customer onboarding and transaction activity. Imbach added that customers have been increasingly concerned about counterparty risk and the degree to which their assets are segregated, along with having questions about Bitcoin as digital gold and requests for information about asset reallocation.
Imbach also mentioned that geographic sensitivity has increased, taking into account the regulatory status of counterparties, adding that this has come to be a major differentiating factor for Sygnum as both a regulated Swiss bank and a capital markets services licensed entity in Singapore. Imbach said that he has witnessed a change in managerial behavior among clients, which is perhaps not unusual given the unique stresses faced by many companies, adding that: “We do not believe that current events will reduce institutional investors’ interest in digital assets mid-term, on the contrary.”
A spokesperson for Monolith told Cointelegraph that the firm views the current climate as an opportunity for crypto banks to offer decentralized solutions to clients in order to help them manage their funds more effectively. The firm also added that while it is witnessing an increase in stablecoins flowing into the platform, customers are not spending them at the rate they used to:
“This crisis has created an alignment between users searching for better options to save and DeFi offering them a more sustainable way to do so. Behavior on our platform has reflected this movement in a few unique ways. […] Where previously people would use our platform to load their Monolith VISA card to spend, they are now using it to hedge. This behavior of converting into fiat and holding is not something we’ve witnessed in the past, and though a byproduct of circumstance, also shows faith in our feasibility as a genuine alternative to traditional banks.”
Conversely, Bitpay’s Zielke said its customers are still spending, albeit in an online capacity. Video games, delivery services and domain hosting are the prime areas, which is not entirely surprising given the state of lockdown for most customers: “Additionally, people have been buying more gift cards from the BitPay app or gift card sites like eGifter.com for purchases at Amazon, Whole Foods, Uber and Home Depot.” Despite the coronavirus, Zielke said that the first quarter of 2020 has been an improvement of over nearly 10% in terms of dollar volume as more people stay at home:
“Comparing Q4 last year to Q1, 2020, BitPay processed almost 10% more volume ($). Key verticals driving this increase were financial services, currency exchange, computer software & engineering and IT services which saw increases ranging from 11-40%. And crypto is crucial to people who do not have access to credit cards or a bank account.”
While many businesses are forced into taking a conservative outlook for future prospects, it seems that at Monolith is confident that the COVID-19 climate is a fertile environment for crypto banking and financial technology innovation:
“We currently have the largest holding of crypto that we’ve ever had and are in a strong position to continue innovating for another year and a half, as the dust settles, with no need to touch our crypto reserves.”
Silvergate Adds 46 More Crypto Clients In Q1 While Existing Customers Increase Deposit Levels
Silvergate Bank added 46 crypto customers in the first quarter and saw fee income and deposits increase from those customers because of “Black Thursday,” according to its earnings report released before market open on Wednesday.
“The increase in total deposits from the prior quarter was driven by an increase in deposit levels from our digital currency customers who maintained excess capital with Silvergate as a result of the dislocation taking place in the digital currency markets during March,” the bank wrote in its earnings release.
The publicly traded La Jolla, Calif.-based bank is one of the few U.S. banks willing to serve crypto-related businesses and has most of its deposits from the crypto sector.
The bank went public on the New York Stock Exchange under the trading symbol SI in November. With $2.3 billion in total assets, it’s less than 1% the size of JPMorgan Chase’s $3.1 trillion in assets.
The bank now has 850 digital currency customers, including 61 exchanges, 541 institutional investors and 248 other customers.
The largest customer segment increase was in institutional investors, which increased by 32. The bank also claims to have more than 200 prospective clients in its pipeline.
Deposits from digital currency customers increased by 35% to around $1.7 billion, making up the majority of the bank’s total $2 billion deposits. Other deposits at the bank decreased by around 45%.
Average balance of deposits was up by only $100 million while deposits for period end were up $400 million, because of institutional investors putting more cash back into their accounts, CEO Alan Lane said on an earnings call Wednesday.
The bank’s cost of deposits continued to rise from .84% in the fourth quarter of 2019 to .87% in the first quarter of 2020. This is around the average for mid-cap commercial banks and is up from the first quarter of 2019 when the cost of deposits was .08%.
Fee income from digital currency customers increased by more than $300,000. In an earnings call, Lane said that each of the fees for the bank remained flat or increased this past quarter. Last quarter fee income and deposits dropped, even while the bank was adding more customers.
The bank’s net income was $4.4 million, up by 22% from last quarter but down 53% from the same time last year.
The bank’s Silvergate Exchange Network (SEN) handled 31,405 transactions in the first quarter compared to 14,400 transactions in fourth quarter of 2019. This was more than triple what the number of transactions were on the SEN a year ago. SEN’s volume increased by $7.8 billion to $17.4 billion total in the first quarter.
The network allows commercial customers to instantly move U.S. dollars between different crypto exchanges and remains open on nights and weekends, unlike traditional markets.
The bank plans to add more products to the SEN in the future, including a bitcoin-on-margin lending feature called SEN Leverage which is currently in pilot mode. The bank has approved $12.5 million in bitcoin collateralized loans so far and plans to roll out the product in 2020.
In the earnings call, Lane said the bank continues to explore product options around crypto custody and settlement. In response to analyst questions, Lane also 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.
In answer to a question about how Silvergate might benefit from the launch of Libra, Silvergate executive vice president of corporate development Ben Reynolds said that the bank offers cash management products for quickly transferring fiat to stablecoin.
“I think it’s fair to characterize this as we’re investigating it and keeping our options open in working with all stablecoin participants,” he added.
The bank also kept a high risk-based capital ratio – total capital to risk-based assets – in the first quarter, staying around 26% where other banks are normally around 12% to 14%, said Mike Perito, a bank stock analyst at investment firm Keefe, Bruyette & Woods.
The bank also established a referral partnership with Seacoast Commerce Bank in National City, Calif., for customers seeking assistance under the U.S. government’s Paycheck Protection Program. Neither Silvergate nor Seacoast broke out how many, if any, of Silvergate’s crypto clients applied for PPP loans.
Silvergate also increased its provision for loan losses to $400,000, compared to no provision for the fourth quarter of 2019. While the bank serves the crypto industry on the deposit side, it turns those deposits into interest-bearing deposits at other banks, investment securities and loans.
Like many traditional banks, Silvergate’s largest segment of loans are made up of commercial real estate and one- to four-family real estate loans. Because of the bank’s low loan-to-value margins and its low exposure to the hospitality and retail space, none of its modified loans have been considered troubled debt under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Lane said.
Silvergate holds a fiscally conservative position so it can focus on building out products for the crypto sector, he added.
“While the outlook of the economy remains uncertain, our first-quarter results clearly demonstrate the steps we have taken to prepare for a digital world,” Lane said.
World’s First Crypto Bank Adds Support For Ripple’s XRP
Sygnum Bank will allow its users to invest in Ripple’s XRP token via their e-banking portal.
Sygnum Bank, the first crypto bank licensed by FINMA, announced on April 30 that Ripple’s XRP tokens are now available through its banking services platform. Users can access deposit, exchange, and credit services using the popular digital currency.
Based in Switzerland, the bank will now allow the third most capitalized digital token behind Bitcoin (BTC) and Ethereum (ETH) to be used by clients seeking to diversify their direct investments in digital tokens, in conjunction with other asset management products offered.
Sygnum customers can use deposits in traditional currencies, such as the Swiss franc, the Euro, the Singapore dollar, and the US Dollar, to buy, hold and trade XRP tokens backed by the Ripple protocol.
Increasing Liquidity In The Banking Portfolio
Additionally, customers can transfer XRP tokens to their Sygnum deposit account or increase their liquidity in traditional fiat currencies with a Lombard loan granted against XRP.
Mathias Imbach, Co-Founder Of Sygnum, Praised The Announcement And Commented As Follows:
“We were impressed with Ripple’s excellent performance globally – they now have more than 300 financial institutions in their global payments network, RippleNet. The XRP-based solutions developed by the company resolve weak spots in the growing global remittance market of $ 700 billion. The low cost of transfers makes it an ideal tool to facilitate payments in emerging economies.”
The bank also highlighted that the Ripple protocol provides instant cross-border transfers at a low cost, rather than the traditional way of sending money abroad.
Sygnum’s customer assets are held in separate, highly secure individual portfolios. They are available in one click from each customer’s e-banking platform, and accessible anywhere in the world.
Interest In Banks Towards Ripple’s Protocol
It is not the first time that a bank incorporates Ripple’s protocol in its operations. Cointelegraph reported on April 10 that Azimo, a digital money service, partnered with Siam Commercial Bank in Thailand to launch an instant cross-border payment service through RippleNet.
MoneyGram said in February that it received funds from the blockchain-based payments firm, Ripple Labs, to continue scaling the use of blockchain capabilities in its services.
Bitcoin Suisse Seeks $50M To Become A Crypto Bank Unicorn
Bitcoin Suisse is looking for almost $50 million of funding from investors to pursue expansion plans, which include moving into the banking sector.
Swiss crypto broker Bitcoin Suisse is seeking almost 50 million Swiss francs ($51.5 million) in funding to support its plans for expansion into the banking sector.
According to a new report published on May 8, the company is telling investors that it could reach unicorn status, i.e. have a valuation of 1 billion francs ($1.03 billion) by 2025.
Ambitions To Bank Switzerland And The EU
The company has already raised 20 million francs ($20.5 million) in an initial funding round, and has now opened funding up to other investors until mid-June. It hopes to secure at least 46 million francs ($47.4 million), boosting its capital base to 100 million francs ($103 million).
The additional capital is earmarked for the company’s expansion plans, which include a move into the banking sector.
As Cointelegraph reported, Bitcoin Suisse applied for banking and securities dealing licenses from the Swiss regulators in July last year. It also wishes to convert its operations in Lichtenstein into a bank in order to access clients in the European Union.
Other Future Plans
Bitcoin Suisse also intends to improve its proprietary trading and credit business, and hold some funds for further acquisitions.
Last October the firm purchased a minority stake in CoinRoutes, a provider of pan-exchange smart order routing and algorithmic trading software.
It also has plans to hold a security token offering, or STO, in 2021 and get listed on a stock exchange the following year.
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.
Silvergate wants to be the premier bank for crypto, and until Wyoming’s special depository institutions are chartered Silvergate is the only one that has most of its deposit business devoted to the industry.
This post is part of the CoinDesk 50, an annual selection of the most innovative and consequential projects in the blockchain industry. See the full list here.
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.
Wyoming To Host World’s First Cryptocurrency Bank
In just a few months, what will likely be the first cryptocurrency “bank” will be operating in Wyoming.
I’m sure you are used to the idea of a bank having a vault with actual cash and other valuable things on hand. Now, welcome to the digital age, where the score keeping for money is all in a computer. The vault will be a virtual one to keep hackers out.
According to Wyoming Business Report this potential bank will manage what is known as “blockchain technology”. “Blockchain is a ledger platform to administer cryptocurrency transactions. These records consist of pieces, or “blocks,” of information like date, time, dollar amount and participants in a transaction.”
As with any form of currency there are advantages to bitcoin and disadvantages. Those in the business industry acknowledge the downsides and are looking for ways to solve those problems.
Wyoming was the first to build a legal framework for cryptocurrency and is now the first to create legal framework for a new banking cryptocurrency.
It was in 2019 when the state legislature passed a bill establishing “Special Purpose Depository Institutions (SPDIs).”
If you think about it, most transactions today are digital. Credit and debit cards and online baking have made it so. Most financial exchanges worldwide are just numbers passing through the internet. Cryptocurrency, therefore, is just the natural result of what is already happening.
Applications for banks are now being accepted. So where will the first bank be? Or does that matter? It’s all online. The answer is that a few companies, such as Avanti Financial Group, say that they will probably be based in Cheyenne.
Crypto-Friendly Arival Bank Is Launching Today For Those Willing To Disclose Their Bags
After two years of laying the groundwork, crypto-friendly Arival Bank is launching in beta Thursday. (Yes, even a bank can “launch in beta” these days.)
To be precise, Arival is more of a fintech startup than a bank in the traditional sense. A team of 20 with offices in Singapore, Puerto Rico and Miami, Fla., it plans to provide banking accounts to crypto startups via its sponsor bank, Puerto Rico-based San Juan Mercantile Bank and Trust.
But there’s a catch: if you want to bank with Arival and you own crypto you also need to show what’s in your wallet.
The firm is using tools from the blockchain analysis firm Elliptic to scan the crypto addresses that onboarding clients provide and see if there are any suspicious transactions.
“To the extent that Arival will be servicing crypto customers, we take very seriously the need to complete due diligence to ensure they are regulated and legally compliant issuers. Arival has no intention of servicing non-compliant entities or bad actors,” such as those under the U.S. sanctions, co-founder and chief operating officer Jeremy Berger said.
The conditions are a stark reminder of the cryptocurrency industry’s uneasy relationship with the legacy banking system. Traditional institutions have largely been loath to provide even basic accounts to the young sector’s startups, for fear of enforcement actions if they even inadvertently facilitate money laundering, sanctions violations or other financial crimes.
The revenue from the relationships often isn’t enough to justify the risk in bankers’ minds, and the few willing to do business with crypto firms, therefore, take a belt-and-suspenders approach to customer due diligence.
While monitoring a client’s crypto dealings, Arival’s compliance department would pay attention to things like where the clients and their own customers come from, transaction volume on the wallets, “specific cryptocurrencies utilized, conducting a transaction with a shell company” and other factors, Berger said.
The clients are obliged to report if they own crypto, and Arival will be looking out for publicly available information pointing at that, he said. “We do media checking so we see if the client has involvement in the crypto space, and then we make an educated guess that they do have a crypto wallet.”
A failure to report the fact of owning crypto would put a client “in a high-risk category” and potentially lead to suspending the account “until further investigation and receipt of corroborating information,” Berger said.
In the “beta” stage, clients will only be able to open a business account with Arival, park their funds and transfer it around the world if they need it, with more options coming later this year, Berger said.
In the pipeline for the coming months are individual accounts, card issuance, analytics products for businesses and remittances in different currencies. Arival is also aiming to introduce lending and deposit and savings products down the road.
According to Berger, there are around 3,000 prospects on Arival’s waiting list, and the firm will now start onboarding those clients. They come mostly from U.S., U.K, E.U., Hong Kong, Singapore and more than 60 other countries.
Potential clients, Berger said, include new venture-backed crypto and fintech startups; crypto exchanges overseas that want to allow dollar deposits but have a hard time opening a U.S. bank account; independent contractors; and micro-businesses of three to five employees.
All of those businesses can open an account with Arival without visiting a physical office, Berger said. Crypto disclosures aside, the know-your-customer (KYC) procedure is quite painstaking, he said: a potential client needs to submit a selfie, a video, and three types of identifying documents.
Then, Arival runs the data through multiple datasets, from social media monitoring to face-recognition tools.
Arival applied for a Puerto Rico International Financial Entity (IFE) license in August 2018, because it is easier to get than a U.S. bank charter. However, the process turned out to be far from easy anyway: Arival has only received a preliminary approval (“permit to organize”) so far.
Part of the reason was that the Puerto Rico authorities have been dealing with hectic times recently, with U.S. regulators cracking down on the country’s banking industry last summer and the coronavirus pandemic leaving government offices shut for almost two months this year, Berger said.
However, Arival is on its way for a full IFE license and has made overtures in other jurisdictions as well: the firm applied for a digital wholesale banking license in Singapore and an electronic money institution (EMI) license in Lithuania, Berger said.
Igor Pesin, Arival’s co-founder and chief financial officer, said that having a variety of licenses will help the firm become “a borderless digital bank and banking-as-a-service partner for global fintech startups.”
Arival was founded more than two years ago by a small team of fintech professionals from Russia and the U.S. with a focus on crypto entrepreneurs and gig economy workers, who may find it hard to get business accounts with traditional banks.
The company raised $2.4 million via a crowdfunding campaign at SeedInvest and is now raising its Series A round, Berger said.
Wyoming-Based Avanti To Open In October With A New Bank-Issued Digital Asset
Avanti Financial expects to open its doors this October with a new bank-issued digital asset.
Led by Wyoming blockchain advocate Caitlin Long, the crypto-friendly bank announced Thursday its application was accepted by the Wyoming Division of Banking on July 15. Avanti will open in the fall because the regulator accelerated the timeline of its application process.
In the same announcement, Avanti revealed its plans to issue Avit, a programmable digital asset that can only be issued by banks and will be treated as a cash equivalent. With Blockstream as the bank’s technology partner, Long said in an interview that “one could presume that the Bitcoin blockchain will be involved,” but could not comment further.
If Avanti’s charter application is approved in October, the bank will be the only financial institution capable of issuing Avit. While Avit would not be pegged one-to-one to the U.S. dollar – because it’s a new digital asset, not a digital representation of a real-world asset – the currency would be 100% backed by a reserve of liquid traditional U.S. assets. (The bank requires this reserve for all the assets it custodies.)
Avanti claims Avit will not have the same delayed settlement and chargeback issues that traditional fiat payments face.
Because an automated clearing house (ACH) transaction can be reversed several weeks after a payment has been made, exchanges and other asset service providers often hold traders’ cash for several days, Long said.
“There’s a lot of counterparty risk in OTC trading of digital assets,” Long said. “Everyone wants to settle second. What we’re doing is offering the ability for both sides to settle simultaneously.”
The bank also claims Avit will not have the legal, accounting or tax issues associated with stablecoins.
“No one knows the legal enforceability of digital assets in the U.S. because they fall through the cracks,” Long said. “The legal clarity of all stableicons is not there. Tax and accounting is also far from clear.”
Long argued that despite the Office of the Comptroller of the Currency (OCC) letter clarifying that U.S. banks may provide crypto custody, the special purpose depository institution in Wyoming is still the most advanced framework for crypto custody in the U.S.
“The OCC and 49 other states do not yet have in place the comprehensive legal structure necessary for enabling digital asset custody without significant legal risk,” Long said in a press statement, adding:
“They also do not have a roadmap for courts to adjudicate disputes involving digital assets and do not provide the certainty in bankruptcy that Wyoming provides for digital asset custodians. Its prudential standards make Wyoming the only jurisdiction in the U.S. where digital asset custody in a bank can truly be executed in a safe and sound manner.”
Signature Bank’s Crypto Deposits Grew $1B In Q2
Out of the nearly $8 billion in deposit growth that Signature Bank saw in the second quarter of 2020, $1 billion was raked in by the firm’s digital assets team, according to the bank’s most recent earnings report.
While Signature doesn’t break out its total deposits by business line, the increase is a record for the New York-based, crypto-friendly bank. On an earnings call, Signature CEO Joseph DePaolo also attributed deposit growth to an increase across every business line in the bank, including the blockchain-based payment platform Signet.
The crypto industry is often a rich source of low-cost, non-interest bearing deposits for crypto-friendly banks like Signature, Silvergate Bank and Metropolitan Commercial Bank, and analysts have paid close attention to Signature’s deposit growth as a result.
“This is now the fourth consecutive quarter exceeding $1 billion in both total and average deposit growth, non-interest bearing deposits of $16.1 billion still represent a high 32% of total deposits since the second quarter of last year,” DePaolo said on an earnings call on Tuesday.
The cost of those deposits also decreased to 56 basis points from 98 basis points because of the low interest rate environment, the CEO added. For the sake of improving profitability, the bank wants to get the cost of deposits down around 40 basis points, the CEO said.
The company’s executive vice president of corporate and business development, Eric Howell, commented on the earnings call that the bank’s net interest margin will be up if the bank gets back to a more “stable” deposit growth of between $500 million to $1 billion a quarter.
The bank earned around $117 million in second quarter 2020, a significant decrease from the $147 million in second quarter 2019 after putting up a provision for credit losses of $93 million this last quarter.
Notably, the bank made Paycheck Protection Program (PPP) loans to nine crypto companies.
Custody provider Copper announced on Monday that it had integrated with the bank’s blockchain payments platform, Signet.
The integration means Copper clients like crypto exchanges will now get to use Signet for faster payments and settlement times in U.S. dollar transactions.
“Previously, the process of paying and settling transactions was far more complex,” Copper CEO Dmitry Tokarev said in an emailed statement. “In order to route fiat currencies, customers had to go from their exchange account, back to Signature Bank, then back to their exchange account. Now, both fiat and digital assets can be moved within the Copper platform.”
Copper offers multi-signature custody and prime brokerage to its clients. This is provided by Copper’s Walled Garden infrastructure, giving clients access to trading facilities without taking digital assets out of custody.
Silvergate’s Bitcoin-Backed Lending Product Grew 80% In The Last Quarter
Silvergate Bank continued to add a steady drip of crypto customers in the second quarter of 2020 but its issuance of bitcoin-collateralized loans grew by $10 million, outperforming the growth of its real estate loan book by 10x.
According to its latest earnings report, released Monday morning, the bank’s traditional loan portfolio – a real estate–heavy loan book of about $1.1 billion – only increased by $1 million from the first quarter. Bitcoin-collateralized loans through the bank’s SEN Leverage product surged by $10 million in the first quarter.
The uptick from $12.5 million to $22.5 million represents 80% quarter-over-quarter growth for the product, which is part of the Silvergate Exchange Network (SEN).
The publicly traded La Jolla, Calif.-based bank is one of the few U.S. banks willing to openly serve crypto-related businesses and has most of its deposits from the crypto sector. The bank went public on the New York Stock Exchange under the trading symbol SI in November. With $2.34 billion in total assets, Silvergate is less than 1% the size of JPMorgan Chase, a $3.1 trillion behemoth.
Key Stats From The Earnings Report Include:
* Activity on the SEN increased by 28% since last quarter to more than 40,000 transactions.
* The volume running over the SEN increased by 29% quarter-over-quarter to $22.4 billion.
* Silvergate reaped $2.4 million in total fee income from digital currency customers.
* The bank’s risk-based capital ratio – total capital to risk-based assets – fell by half a percentage point to 25.54% from 26.05% in the first quarter.
The bank continues to have a steady pipeline of more than 200 customers waiting to be onboarded, Silvergate CEO Alan Lane said in a press release.
State-Run Bank In Switzerland To Launch Crypto Services
Swiss cantonal bank Basler Kantonalbank becomes the first bank in Switzerland to announce its crypto plans.
Basler Kantonalbank, or BKB, a government-owned commercial bank in Switzerland, is planning to launch cryptocurrency services through its banking subsidiary.
According to an Aug. 3 report by local news agency Finews, BKB’s subsidiary and a national banking group, Bank Cler, are working on services that will allow customers to trade and store cryptocurrencies. BKB holds a majority stake in Cler, though the subsidiary possesses its own banking license separate from BKB.
Access To Financial Products
A spokesperson at BKB confirmed the news to Cointelegraph. They also noted that the bank plans to launch these products in response to an increased demand for crypto services in the country.
The BKB Representative Said:
“In the BKB Group, we are working to offer our clients a solution for the trading and deposit of selected cryptocurrencies. As an established regional (Basler Kantonalbank) and indeed national (Bank Cler) banking group, we wish to give our clients secure access to these new financial products.”
The spokesperson did not specify what types of cryptocurrencies will be available through BKB. Development is currently at an early stage and there is not yet a tentative date for launch.
Ahead Of The Pack
These plans make Basler Kantonalbank the first government-backed bank in Switzerland to enter the crypto industry. “This topic is being driven forward within the BKB Group by the digital competence centre of Bank Cler,” a BKB spokesperson said regarding the matter.
Home to the infamous “Crypto Valley,” Switzerland is known as one of the most crypto-friendly jurisdictions in the world. In August 2018, Swiss SIX Exchange-listed bank, the Hypothekarbank Lenzburg, became the first Swiss bank to provide company accounts for blockchain and crypto-related fintech companies. Maerki Baumann, an unlisted family-owned bank in Switzerland, reportedly became the second bank to accept crypto in August 2018.
Julius Baer, a top-five Swiss bank, saw its net profit surge over 30% after listing Bitcoin and other cryptos in the first half of 2020, as reported on July 20.
Bequant, Now in Crowded Prime Brokerage Race, Adds Signature Bank Integration
Ferrari sells cars so it can go racing; Bequant built a crypto exchange to get into prime brokerage.
That’s the analogy offered by the firm’s head of institutional services, Alex Mascioli, when asked about a new banking relationship with Signature’s blockchain-based payments platform, Signet, first revealed to CoinDesk this week.
Prime brokerage, Mascioli said, was always Bequant’s race to win.
Prime brokers are facilitators for financing and trading for deep-pocketed institutional investors. While the digital asset space doesn’t have a lot of prime broker options currently, several crypto firms including Coinbase, BitGo and Genesis Trading have announced in recent months their intent to build prime brokerage wings.
Bequant was building a prime brokerage service for crypto before it was cool, said CEO George Zarya.
“When we started building the prime brokerage product almost two years ago, nobody was doing it,” Zarya said. “There were a couple of players that called themselves prime brokers, but what they were doing was aggregating liquidity.”
To compete in a newly crowded market, Bequant’s connection to Signature Bank’s Signet will allow the firm to more easily settle fiat for more clients. Bequant is also connected to the Silvergate Exchange Network, Globitrex Exchange and U.K.-based electronic money institution BCB Group, Zarya said.
“It’s an important transition between the legacy financial markets and the new digital markets,” he added.
The variety of banking and payments relationships allows Bequant to serve clients that use a variety of onramps to the U.S. dollar, because no U.S. bank has emerged as a clear leader in the digital asset space, Zarya said.
The firm now boasts a list of services that includes capital introduction, fund administration, securities lending, multi-exchange direct market access, custody, collateral management, leveraged trade execution, over-the-counter block trading, risk management and smart order routing.
According to Zarya, clients care most about easy access to spot and derivatives markets, lending, managing collateral across exchanges, having analytics on top of their portfolios and APIs that can let them connect to multiple exchanges at once. The products that cost the most for the firm to build were custody and collateral management, he added.
Blockforce Capital CEO Eric Ervin said capital introduction is where prime brokers in traditional markets can stand out. (Ervin uses Tagomi as Blockforce’s prime broker.) In the traditional world, investment banks like Goldman Sachs and Morgan Stanley connect clients to hedge funds, pension funds and endowments.
Bequant is connected to 11 sources of liquidity currently including HitBTC, Binance, OKex, Huobi, Bittrex, Bitifnex, Deribit and Bequant’s own exchange and plans to expand it’s exchange connections to a dozen by the end of the year. The other four sources of liquidity are unnamed OTC desks.
“These exchanges are venues that our team has one-on-one relationships with,” Mascioli said. “This isn’t as simple as dropping in APIs.”
When Bequant launched its exchange two years ago, Zarya said he recognized there was a need for an institutional-grade exchange offering high-frequency trading services. Most exchanges are still built to serve primarily retail customers, he added, meaning their infrastructure struggles to keep up with high trading volumes.
“One of the issues that we’ve had with some of our exchanges is the rate per second allocation,” Zarya said. “If you trade a high-frequency trading strategy, you may want to opt into a higher rate-per-second allocation.” Bequant’s internal trading averages around 400 microseconds per trade, which is close to the London Stock Exchange’s 150 microseconds.
The firm is currently planning to raise a round of venture capital to beef up operating capital on its lending side.
“We’ve managed to build a great product by bootstrapping,” Zarya said. “Our exchange business turned profitable within the first 12 months. … It took us about $2.5 million to get it up and running.” Zarya expects the prime brokerage side of the business to be profitable within the next six months.
Signature Bank Gave Dozens More PPP Loans to Crypto Firms Than Previously Reported
Signature Bank extended dozens more loans under the federal Paycheck Protection Program (PPP) to cryptocurrency businesses than was previously reported.
Around $20 million of the $1.9 billion in PPP loans the bank extended was given to roughly 40 firms in the digital asset space, said CEO Joseph DePaolo.
The executive would not name the firms it gave PPP loans to or give an exact number of firms who took out a loan through the relief program. (Signature’s $1.9 billion in loans accounts for roughly .55% of the entire $350 billion that was disbursed through the U.S. Small Business Administration.)
Public records show that Signature issued loans to a number of prominent firms in the space, including Ethereum venture studio ConsenSys, VC firm Polychain Capital and crypto lender Celsius Network.
DePaolo said the bank’s crypto PPP loan volume was due to other banks serving crypto not having the resources to offer the same kind of program. Previously, CoinDesk reported that at least $30 million had been extended to crypto companies by several banks including JPMorgan Chase, Silicon Valley Bank, Cross River Bank and others. (CoinDesk also reported Signature had extended only nine PPP loans to crypto firms.)
The news further reveals a deeper need in the crypto industry for relief in the wake of the global economic crisis caused by the COVID-19 pandemic. Likewise, Signature’s program proves the bank’s commitment to the digital asset space.
While Signature’s business is primarily focused on serving high-net-worth individuals and it does not call itself a crypto bank or refer to its digital asset team as a crypto banking division, the bank did rake in $1 billion in deposits from the sector in the second quarter 2020 alone.
“I believe I said it about a year and a half ago, that if you weren’t into blockchain technology and the digital world in five years, you would have a problem as a bank. There’s three and a half years left, and it may be sooner,” DePaolo told CoinDesk in a recent interview.
“I think the situation we have right now with this pandemic and the quagmire, it’s going to make the public look at digital currencies.”
Signature Bank’s Crypto Awakening
In January 2018, the bank hired Joseph Seibert as the senior vice president for its digital asset banking team. Seibert started with three employees and has grown the team to 12 as of August 2020. He was previously a vice president at similarly crypto-friendly Metropolitan Commercial Bank.
The bank’s Signet payments platform is a proprietary blockchain based on the Ethereum protocol which allows for fee-less instant fiat settlement.
While it’s popular within the digital asset space, firms outside of the space, such as renewable energy companies, use Signet to settle thousands of transactions a day without dealing with the payment friction between suppliers and wholesale distributors.
Seibert added that Signet has the same capabilities as the Silvergate Exchange Network but is built on blockchain versus the bank’s internal systems.
“We have the same ecosystem they have and did it in under three years,” he said.
The bank started out by serving exchanges, which Seibert calls “the octopus” because of how many firms that need banking services in crypto are tied directly to the exchanges. The bank now serves proprietary traders, hedge funds, custody firms, mining farms and other verticals in the space, he said.
Signature does treat firms in the digital asset space carefully, to offset transactional costs for traditional payment rails (wires and ACH payments). For instance, digital asset exchanges on Signet have to keep 30% of their balance in a non-interest bearing account.
Signature’s PPP program and recent growth in deposits from crypto customers makes it confident as a leader in the cryptocurrency banking space, Seibert said.
“There’s more bank competition overseas, but they are always going to need the U.S. dollar on-ramp,” he said.
The bank is now looking to expand its Signet offering beyond U.S. dollars with the launch of a foreign currency exchange wallet sometime in the near future.
A number of the bank’s clients are FX liquidity providers, and Seibert believes foreign exchange is a large component of the crypto space, with some FX trades still taking weeks to settle if a bank is not crypto-friendly.
“Ideally we would like to launch that sooner rather than later, hopefully next year,” Seibert said of the new forex service.
Kraken Becomes First Crypto Exchange To Become A US Bank
Kraken is the first cryptocurrency firm to become a bank.
On Wednesday, the Wyoming Banking Board voted to approve the San Francisco-based crypto exchange’s application for a special purpose depository institution (SPDI) charter. Kraken is now the first SPDI bank in Wyoming. According to the Wyoming Division of Banking’s general counsel, Chris Land, Kraken will also be the first newly chartered (de novo) bank in the state since 2006.
“By becoming a bank we get direct access to federal payments infrastructure, and we can more seamlessly integrate banking and funding options for customers,” said David Kinitsky, a managing director at Kraken and the CEO of the newly formed Kraken Financial. (Kinitsky has run Grayscale Investments, was the first digital assets hire at Fidelity and was most recently head of business development at payments startup Circle.)
In the wake of a July letter from the U.S. Office of the Comptroller of the Currency giving national banks the go-ahead to custody crypto, the Division of Banking also announced it has been working with Promontory Financial Group, a prominent Washington, D.C.-based consulting firm made up of lawyers and former government regulators.
In October, the division along with Promontory will publish the first manual for banks regarding procedures and policies for handling digital assets, Land said.
In addition to more products, Kraken Financial will give Kraken the ability to operate in more jurisdictions, Kinitsky said. As a state-chartered bank, Kraken now has a regulatory passport into other states without having to deal with a patchwork state-by-state compliance plan.
Kraken has been silent about its application until now. The first hint the exchange was interested in the Wyoming charter was in December when it opened a position for the job Kinitsky has now.
“We would expect to offer a host of new products as we get established,” Kinitsky said. “Those will range from things like qualified custody for institutions, digital-asset debit cards and savings accounts all the way to new types of asset classes. We can engage with securities and commodities and things like that as a bank. So a lot more TBD there.”
Kraken expects its major revenue drivers to be fees and services, Kinitsky said. SPDIs are not allowed to lend, and each bank has to hold 100% of its assets in reserve. Kraken wouldn’t say how much equity capital the firm raised for its application, but the Division of Banking is encouraging applicants to raise between $20 million and $30 million, similar to the equity capital kept at a de novo bank.
Initially, Kraken Financial will play the same function as third-party banking relationships that Kraken has already formed, Kinitsky said. Eventually, the subsidiary will become the U.S. customer service provider, with Kraken affiliated services offered on the back end.
Having received the charter, Kraken will focus on building out operations and personnel for the bank, aiming to have 10 to 25 department heads to start out, Kinitsky said. The exchange has hired its board and C-suite and expects to have the rest of its permanent hires in place by the end of the month.
The statutes undergirding the SPDI charter reconcile digital assets with the U.S. uniform commercial code by making the safekeeping of digital assets a bailment, which is the same legal relationship that valet drivers have to the cars they park, said Wyoming blockchain pioneer Caitlin Long.
SPDI banks can hold digital assets but will never have legal ownership over those assets. This means that even if a SPDI bank goes bankrupt, those assets have to be returned to customers, whereas a trust company can have its assets claimed by a judge during bankruptcy.
Long has her own SPDI bank application underway, called Avanti Financial, which she expects to open in October with new bank-issued digital assets. She expects SPDIs to diversify the crypto banking sector, which has been historically underserved.
The Division of Banking is currently working with six companies that are applicants or potential applicants for the charter, and each company could be chartered by the end of 2021.
Long also expects the SPDI charter to pressure crypto companies to offer proof of reserves to customers and the industry at large.
“SPDI banks have to provide a Merkle tree to their auditor so they can cryptographically verify that their reserves are there,” she said. “We have zero insight into whether the service providers are solvent or not and they’re not even audited in most cases.”
Silvergate Bank: How Deep Is the Moat?
While not often in the limelight, Silvergate Bank serves as an integral part of the cryptocurrency ecosystem.
It’s often claimed by crypto enthusiasts that bitcoin will eventually displace the financial system as we know it. As it stands today, however, banks still play the pivotal role of fiat on/off ramps for exchanges and investors.
CoinDesk Research presents an in-depth look into San Diego-based Silvergate Bank, a leading bank serving the cryptocurrency industry. With over 880 digital asset clients with an aggregate balance of $1.5 billion in deposits, Silvergate is one of the market leaders within this niche market.
* Due to increased levels of risk and higher compliance requirements, there exist only a handful of U.S. banks, including Silvergate, who provide banking services to cryptocurrency customers.
* Silvergate sets itself apart through its deep list of industry connections as well is its unique products that cater to the digital asset industry such as its instant payment network, SEN.
* The total number of customers continues to increase, but Silvergate’s deposits have failed to grow over the past two years. Despite the utility of SEN, management notes the bank has experienced deposit outflows to competitors offering yield on deposits, unlike Silvergate whose deposit base is almost exclusively non-interest bearing.
* As the space matures, it’s likely more banks will feel compelled to service the crypto market, just as JPMorgan recently announced its acceptance of Coinbase and Gemini as its first digital asset customers. This type of development could be a major cause for concern for Silvergate as it competes with much larger financial institutions with more access to capital. Should this become the case, it will become crucial for Silvergate to deepen its competitive moat by boosting SEN’s utility.
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