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."