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Analysts Question Silvergate Execs on Whether Crypto Deposit Growth Will Continue

The majority of the new deposits came from cryptocurrency exchange clients.

Jan 21, 2021 at 1:20 p.m. UTC
Updated Sep 14, 2021 at 10:59 a.m. UTC

Silvergate Bank accepted a whopping $2.9 billion in new deposits from new and existing digital currency customers in the fourth quarter of 2020, according to an earnings report released on Wednesday.

The majority of these new deposits came from crypto exchanges, which deposited $1.7 billion more in cash to their accounts quarter-on-quarter. Silvergate lists Coinbase, Kraken, Bitstamp and others as customers.

Institutional investor deposits grew by $961 million and those from other customers by $234 million. The La Jolla, Calif.-based bank added 41 digital currency customers for a total of 969. 

Crypto firms are often a rich source of low-cost deposits for the few banks that openly serve the sector. For 2020, Silvergate’s average cost of deposits was 0.27%. For scale, average deposit costs for mid-cap commercial banks are normally around 0.75% to 1.25%.

The Silvergate Exchange Network (SEN), a fiat on-ramp for bitcoin markets, processed 90,763 transactions and transferred $59.2 billion over the network during the last quarter. 

Analysts on the bank’s conference call Thursday morning wanted to know whether CEO Alan Lane and Chief Strategy Officer Ben Reynolds thought this deposit growth was a sign of more permanent deposits or if it was another sign of the cryptocurrency market’s volatility.

“Average deposit balances for the quarter were a little under $3 billion versus … $5 billion [at the end of the fourth quarter],” Lane said. “So there was definitely a run-up in the second half of the quarter, which was consistent with SEN volume that we were seeing and the activity we were seeing in the broader digital currency ecosystem.”

Lane said the bank doesn’t have reason to believe these deposit growth conditions will “slow down anytime soon.”

SEN Leverage, Silvergate’s bitcoin-backed lending business, is another place for the bank to deploy new deposits, Lane added. There is a cap on how many crypto-backed loans Silvergate wants to extend, however. 

“As we get to a point where we’re reaching our comfort level on balance sheet exposure, we will seek to find others to participate in those loans too so that we can continue to grow that product,” Lane said. “We believe that in a yield-starved world, that this will be a very attractive asset class.”

Working with other entities to extend crypto-backed loans would turn SEN Leverage into both an interest-income opportunity and a non-interest-income opportunity for the bank, Lane said.

At the end of the fourth quarter, less than 5% of the bank’s eligible customers were SEN Leverage borrowers, and the bank continues “to see significant opportunity to expand,” Reynolds said.

Fee income collected from digital currency customers was $3.8 million in Q4 2020, a $500,000 increase from the third quarter. Through the whole of 2020, Silvergate raked in $11.1 million in fees from digital currency clients, more than doubling the $4.9 million earned in 2019.

The bank’s tier 1 leverage ratio – which measures equity capital against risk-weighted assets – dipped below 10% in the fourth quarter, but remained well above the regulatory threshold of 5% at 8.29%.

The bank also announced Thursday a crypto custody solution for its institutional clients launched in partnership with a “regulated sub-custodian.”

“We didn’t want to incur the capital expenditure of standing up our own [custody product],” Reynolds said of the unnamed partner firm. “Plus they’ve already gone through the process of obtaining insurance and securing digital assets.” 

Reynolds said custody was a necessary piece to allow the bank to scale its stablecoin and SEN Leverage lines of business. Many of the newly chartered crypto banks are limited-purpose in nature, Reynolds said, and still need a relationship with Silvergate. (Silvergate is a fractional reserve bank that is allowed to hold deposits at the Federal Reserve and make loans.)

Executives also addressed new entrants to the space, like crypto custodian Anchorage and its brand-new national trust charter from the U.S. Office of the Comptroller of the Currency

“We really don’t view the more crypto-native firms as being competitive to the SEN,” Reynolds said, adding:

“Most of them tend to see each other as competitors and see Silvergate as independent. So if they were to participate in a network that a competitor stands up, that could be viewed as being detrimental to their own business objectives of increasing liquidity and customer adoption of their platforms.” 

UPDATE (Jan. 21, 19:31 UTC): Adds charts, new headline, information from earnings call and context throughout.

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