“Life as a crypto agency could be divided up into earlier than Silvergate and after Silvergate,” Sam Bankman-Fried wrote in a quote featured on the web site of the San Diego financial institution he used to switch buyer funds to his digital asset trade FTX.
“It’s laborious to overstate how a lot it revolutionised banking for blockchain firms.”
Silvergate was an unlikely candidate to turn out to be the financial institution behind the $40bn crypto trade that collapsed into chapter 11 final month.
For many of its 30-year historical past, it was a tiny group lender targeted on financing small actual property offers, with three branches in southern California and fewer than $1bn of property.
However by 2019, it was quickly changing into the biggest cryptocurrency financial institution within the US, with 1,600 of the world’s prime crypto miners, exchanges and custodians utilizing it to deposit and switch billions of {dollars} every month.
Deposits surged from roughly $2bn in 2020 to greater than $10bn in 2021. By this yr, complete property had leapt to $16bn. Barely 10 months after itemizing on the New York inventory trade on the finish of 2019, at $12 a share, Silvergate’s share worth had climbed to greater than $200.
“This was a tiny actual property lender that went all-in on crypto,” mentioned one former worker. “It was fully bizarre.”
However the rollercoaster got here to an abrupt halt final week with Silvergate caught within the crosshairs of US senators investigating the failure of Bankman-Fried’s FTX, which has been accused of mishandling deposits from prospects who now withstand $10bn of losses.
Silvergate “seems to be on the centre” of how these funds had been moved round Bankman-Fried’s crypto empire, in accordance with a letter from US senators to the financial institution’s chief government Alan Lane. It mentioned the failure to detect such a “scheme” might imply Silvergate breached anti-money laundering legal guidelines.
Lane tried to deal with market considerations about its hyperlinks to FTX in a public letter final week that accused quick sellers of spreading “hypothesis” and “misinformation”. He mentioned the financial institution carried out “vital due diligence on FTX and its associated entities”.
Silvergate has quietly eliminated the glowing tribute from Bankman-Fried from its web site, together with all reference to its former consumer. The FTX collapse worn out two of the financial institution’s prime shoppers: about 10 per cent of Silvergate’s complete property belonged to FTX and its prospects additionally included crypto lender BlockFi, a significant casualty of the fallout. FTX and its “associated entities” held about 20 totally different accounts at Silvergate, in accordance with its chapter filings.
The financial institution has till December 19 to reply to the letter and supply a “full accounting of its relationship with FTX”.
Lane, a 60-year-old religious Catholic and grandfather to greater than 20 kids who lives in Temecula, California, is the mastermind behind Silvergate’s exceptional shift in technique over the previous few years.
Employed by Silvergate’s founders Dennis Frank and Derek Eisele in 2008 when the financial institution was floundering, Lane deliberate to show it right into a full service industrial financial institution, in accordance with folks near the enterprise. He had beforehand turned spherical a string of small native banks.
However in 2013, Lane began dabbling in crypto. Bitcoin, then a nascent four-year-old expertise, had a report run that yr, surging virtually 7,000 per cent to prime $1,000 for the primary time. Crypto was slowly beginning to achieve mainstream consciousness.
“We would have liked deposits and Alan began seeing that firms like Coinbase had been getting kicked out of banks,” mentioned Ben Reynolds, Silvergate’s president who was employed by Lane in 2016 to turbocharge its crypto technique. “So the concept was: if we will financial institution Coinbase, we will discover deposits. Alan went to the Federal Reserve and mentioned we wish to present primary banking companies to Bitcoin firms they usually mentioned OK.”
Cautious of an rising asset class that had been linked to cash laundering and unlawful medication, main monetary establishments refused to financial institution crypto exchanges and began blocking transfers by prospects to purchase cryptocurrencies. Conventional banks had been additionally not arrange for crypto merchants, who wanted to have the ability to switch cash on the weekends.
Lane and Reynolds recognised the hole and the inefficiency within the fast-growing market and seized the chance, in accordance with the previous worker. “The 2 of them in the identical room simply exploded,” he mentioned. “Silvergate’s founders had been each actual property guys however they liked [the change in direction] as a result of it made cash.”
Over the subsequent six years, Lane and Reynolds offered off Silvergate’s enterprise banking crew and slimmed down its actual property group. Its crypto consumer base grew from about 20 firms in 2016, together with Xapo, Paxos and Bitfury, to greater than 1,000 and its administration began exploring riskier methods of bolstering its steadiness sheet, together with launching a stablecoin and structuring loans in opposition to cryptocurrencies.
In 2017 they launched the Silvergate Alternate Community, or SEN, a platform that allowed crypto buyers to switch US {dollars} from their financial institution accounts on to a crypto trade immediately and 24/7, so long as each the trade and the investor banked with Silvergate.
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Then in March this yr Silvergate issued a $200mn mortgage to an organization owned by American crypto billionaire Michael Saylor, its largest ever step into lending US {dollars} secured by Bitcoin.
“Alan noticed this chance in crypto, which I nonetheless don’t totally perceive, and he’s constructed it into one thing that’s fairly an operation,” mentioned his mentor, former boss and Silvergate investor Frank Mercadante.
Nevertheless it was fraught with threat. Silvergate has needed to make use of twice as many compliance employees as comparable banks of its measurement, in accordance with two individuals who labored there. It usually takes six months for a brand new crypto trade to open a checking account. “The important thing dangers are know-your-customer and anti-money laundering and people had been contemplated critically again in 2014” — when Silvergate gained its first crypto consumer — one of many folks mentioned. In June 2021, Silvergate terminated its relationship with Binance, the world’s largest crypto trade, for undisclosed causes.
“Once they bought into it, crypto was this little new factor, and I believe they didn’t realise it might take off as quick because it did,” mentioned an individual near the enterprise. “So then they put all of the chips in that course, it ran away kind them, it bought very massive in a short time.”
As lawmakers decide over Silvergate’s relationship with FTX, the financial institution can be pressured to look at its publicity to an unregulated business the place the danger of fraud and dangerous actors seems greater than ever.
“The financial institution has no actual accountability for stopping transactions between entities that look official,” mentioned one individual near Silvergate. “That is what will get to the guts of there not being sufficient regulation of crypto companies. For instance, there isn’t any requirement that anybody has to maintain a segregated account that solely has buyer funds.”
Silvergate’s share worth has dropped to half its stage earlier than the FTX collapse, and is down virtually 85 per cent this yr, though at $23 it’s nonetheless virtually double its IPO worth. The financial institution is going through vital uncertainty about its digital deposits, that are down 60 per cent to this point this quarter, in accordance with analysts at Morgan Stanley. “The demise of FTX might additionally drive litigation and headline threat throughout the crypto ecosystem,” they added.
“We had a plan coming into the yr that was challenged by the present setting, and we’re nonetheless attempting to return to phrases with what occurred,” mentioned Reynolds. “It’s a must to ask these questions the place are digital property going from right here, this can be a fairly big reputational problem for the business, these are questions we’re asking.”
