Silvergate Bank reveals benefits of catering to crypto related companies

Financial pundits warning that 2020 will be “The Year of the Next Big One”

Silvergate Bank. A San Diego based bank that caters to innovative businesses in fintech and the cryptocurrency industry, is not exactly a household name that rings a bell, but in the world of digital assets, it reigns supreme. CNBC has said it is a “key to growth in the digital asset industry”, and the Wall Street Journal has commended the management team for taking “a striking stance in the staid world of banking”. The bank is profitable, raised $114 million in additional capital in early 2018, and controls $1.9 billion in assets. The latter item puts the bank just ahead of its middle–tiered brethren.

Silvergate is, in its own way, a profile in courage with regards to the crypto industry. It has gone where other banks have feared to tread, and it has welcomed crypto related clients as worthy customers and supported their efforts, as they build this nascent industry during its early embryonic stages. For its efforts, it has revealed in a recent prospectus filed with the SEC that it has benefited handsomely from its crypto associations.

Per one report:

By the end of last year, Silvergate revealed that it had 542 cryptocurrency-related customers. This was an increase of 122.1 percent from 2017 when the total number of customers was 244, per the prospectus. Total deposits also increased approximately by 8 percent from $1.46 billion to $1.58 billion. Additionally, Silvergate disclosed that it was also in the process of on-boarding some 232 customers.

Silvergate describes its efforts in this space as being the “leading provider of innovative financial infrastructure solutions and services to participants in the digital currency industry,” and it has achieved its recent results when the crypto industry was enduring a massive meltdown in valuations, termed by many pundits as “Crypto Winter”.

In its prospectus, the bank does speak to the risk dynamics of its non-conforming approach: “Our business is subject to many substantial risks and uncertainties you should consider before deciding to invest in our common stock … including risks that that the digital currency industry may not gain widespread adoption, that legal and regulatory uncertainty regarding the regulation of digital currencies and digital currency activities may inhibit the growth of the digital currency industry, that our low-cost funding strategy may not be sustainable, that our deposits may be adversely affected by price volatility.” Such statements are standard disclosures according to SEC dictates.

Banks across the world have been reticent to deal with crypto related businesses, citing issues with reputational risk, possibly dealing with critical issues of money laundering and fraud, and also the fact that many of these startup ventures, some 90% by recent estimates, will result in failure and credit risk for the bank. The global market of crypto supportive banks is slim, but the U.S. banking infrastructure is so different than that of other developed countries that there is always the possibility that a venturesome bank would dramatically break away from the overly regulated herd to offer crypto support.

Silvergate already lists its clients in the crypto space to include digital asset proprietary trading and investment firm Kenetic Capital, crypto-investment fund Polychain Capital, Hong Kong-based bitcoin storage firm Xapo, and the firm behind the PAX stablecoin, Paxos. Silvergate currently estimates the potential of the crypto market in the United States to be deposits of “approximately $30 to $40 billion.” For the time being, only Silvergate Bank and Signature Bank have active eyes on this market potential.

Silvergate’s parent company, Silvergate Capital, has been working towards an Initial Public Offering (IPO) since last November. The bank plans to fund organic growth and expand its current operational capacility with whatever funds are raised during its forthcoming IPO. The bank left open the issue of future acquisitions, but the crypto industry can be assured that its current partner in the banking industry will remain true to its commitment to produce “solutions and services to participants in the digital currency industry.”

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