A crypto bank wants to make money by issuing stablecoins

Photo illustration by Alan Lane.

Image caption: Aïda Amer/Axios. Photo: Courtesy of Silvergate.

Silvergate Bank, the crypto bank of publicly traded Silvergate Capital, sees a future for stablecoins — but that future is fraught with challenges.

Why it matters: Silvergate’s third-quarter earnings report last week missed expectations, a slowdown in its core banking business that was a byproduct of the crypto winter. It has to go through this for its tokenized dollar future.

Push News: Silvergate delayed the launch of its stablecoin last week, saying it could not meet its goal of launching this year.

  • Combined with its poor third-quarter earnings, the stock fell 20%.

What are they talking about: Alan Lane, head of Silvergate, told Axios: “It’s not technical issues that are preventing us from launching at the moment, it’s making sure we have the right agreement with the regulator.”

  • In fact, bureaucratic traffic jams caused by still-under-construction crypto regulations appear to be contributing to the delays. But that hasn’t changed Lane’s view of strategy.
  • “This is the future,” Lane said, referring to stablecoins.

Big picture: To get there, Silvergate must overcome not just regulatory issues — but also competitive hurdles.

  • The $150 billion stablecoin market appears to have its own winners, with the top four players taking the lion’s share.
  • Catching up presents yet another challenge for crypto banks that have yet to launch.
  • It also has to figure out how to distribute its stablecoin once it launches.

conspiracy: “Because we’re not a consumer bank, we don’t have the widely distributed approach that the big national banks have,” Lane said. “We need to solve the distribution problem.”

  • Silvergate plans to use different distribution channels by building Meta’s Diem asset, which the crypto bank bought earlier this year.
  • “Think of a company like Uber, Shopify or Spotify. Any of those platforms are our customers,” Lane said hypothetically. “We will issue them tokenized dollars, and they will distribute it to these users.”

at the same time, Lane said stablecoin legislation is geared towards existing players, creating the possibility of specific challenges for crypto banks.

  • “People are very concerned about how [stablecoin] Issuers manage their reserves, which is not a necessary focus for banks,” Lane said, referring to the proposed legislation. It could basically require banks to do the same thing, segregating reserves into another account.

Game status: A crypto bank does what any other bank does—takes deposits and lends those deposits out—except it also deals with digital assets.

  • Currently, Silvergate continues to provide banking services to Bitcoin whales like MicroStrategy, while also operating as a trading platform for stablecoin issuers like Pax and Circle.

  • “Silvergate is uniquely different from most banks in that our customers need 24/7 access to their funds,” Lane said.
  • “We provide access through SEN” – Silvergate Transaction Network, the bank’s payment platform.

be smart: “We also don’t lend out deposits like traditional banks, and our loan balances are much lower,” Lane said, drawing the line between Silvergate and JPMorgan – and certain bankrupt cryptocurrency lenders.

As for crypto winter, Lane said he had expected trading volumes to decline. But he also pointed to a “moderate decline” in deposits compared to figures from the last bear market cycle.

  • Deposits fell 12.5% ​​in the first and second quarters of 2018, Lane said.

What others are saying: “Shares [Silvergate] Shares of the company fell sharply during today’s trading session [third-quarter] BTIG equity analyst Mark Palmer said in a report last week that it reported lower-than-expected quarterly usage of its Silvergate Exchange Network (SEN).

  • Notice: Palmer reiterated his positive rating on the stock.

what’s next: “[Silvergate is] Working behind the scenes — working on the operational muscle and regulatory compliance so we can roll something out,” Lane said.

Bottom line: Maybe a dark horse will win the stablecoin race. At the same time, the major giants are also fiercely competing for a larger market share.

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