A crypto bank wants to make money by issuing stablecoins

Photo illustration: Aïda Amer/Axios. Photo: Courtesy of Silvergate.

Silvergate Bank, the publicly traded crypto bank of Silvergate Capital, sees its future in the stablecoin – but that future is fraught with pitfalls.

Why is this important: Silvergate’s third-quarter earnings report last week missed expectations, with a slowdown in its core banking business being a byproduct of the crypto winter. He will have to get through this to realize his token dollar future on the other side.

Driving the news: Silvergate delayed the launch of its stablecoin last week, saying it would not meet its launch target this year.

  • That, and its missed third-quarter results, sent shares down 20%.

What they say : “It’s not a technical issue at this point that’s stopping us from launching, but making sure we’re getting it right with our regulators,” Silvergate chief Alan Lane told Axios.

  • Indeed, a bureaucratic gridlock caused by crypto regulations still under construction appears to have factored into the delay. But that didn’t change Lane’s view on strategy.
  • “It’s the future,” Lane says, referring to stablecoins.

The big picture: To get there, Silvergate will need to overcome more than just regulatory issues – there are also competitive hurdles.

  • The $150 billion stablecoin market seems to have its pick of winners, with the top four players accounting for the lion’s share of the pie.
  • Catching up presents another challenge for a crypto bank that has yet to launch one.
  • He also needs to figure out how to distribute his stablecoin once launched.

The plot: “Because we’re not a consumer bank, we don’t have a large-scale distribution method like a large national bank does,” Lane said. “We have to settle for the distribution.”

  • Silvergate plans to use a different distribution channel by relying on the assets of Meta’s Diem, which the crypto bank purchased earlier in the year.
  • “Think of a company like Uber, Shopify, or Spotify. Any of those platforms, they would be our customers,” Lane hypothetically says. “We would give them the tokenized dollar and they would distribute it to those users.”

Meanwhile, The stablecoin legislation is geared toward existing players, leaving open the possibility of specific challenges for crypto banks, Lane said.

  • “There’s a big emphasis on how [stablecoin] issuers manage their reserves, and that’s not a necessary goal for a bank,” Lane says, referring to the proposed legislation. This could essentially force banks to do the same, segregating reserves into another account.

State of play: A crypto bank does what any other bank does – take deposits and lend out those deposits as loans – only they also manage digital assets.

  • For now, Silvergate continues to bank bitcoin whales like MicroStrategy, also functioning as a transactional platform for stablecoin issuers such as Pax and Circle.

  • “The unique difference between Silvergate and most banks is that our customers need access to their funds 24/7,” says Lane.
  • “We provide this access through the SEN” – the Silvergate Exchange Network, the bank’s payment platform.

be smart“We also don’t lend deposits like a traditional bank would, we have a much lower loan balance,” Lane says, drawing a line between Silvergate and, say, JPMorgan — but also some bankrupt crypto lenders .

As for the crypto winter, Lane says he expected a drop in trading volume. But he also points out that deposits saw a “modest decline” from the numbers of the last down cycle.

  • Deposits fell 12.5% ​​between the first and second quarters of 2018, according to Lane.

What others say: “Shares of [Silvergate] fell sharply during today’s trading session after the company [third-quarter] report showed lower-than-expected usage during the quarter of its Silvergate Exchange Network (SEN),” Mark Palmer, equity analyst at BTIG, said in a report last week.

  • To note : Palmer reiterated his positive note on the title.

And after: “[Silvergate is] working behind the scenes – working on the operational muscle and the regulatory compliance muscle, so we can get something going,” says Lane.

The bottom line: Perhaps a dark horse will win the race for stablecoins. Meanwhile, the majors are fiercely competing for more market share.