“Life as a cryptocurrency company can be divided into pre-Silvergate and post-Silvergate,” said Sam Bankman-Fried, who used to transfer client funds to the digital asset exchange FTX. I wrote in a quote posted on the website of the Bank of San Diego.
“It is hard to overstate how much we have revolutionized banking for blockchain companies.”
Silvergate was an unlikely candidate To become the bank behind a $40 billion cryptocurrency exchange that went bankrupt last month.
For most of its 30-year history, it was a small community lender focused on financing small real estate transactions, with three branches in Southern California and less than $1 billion in assets.
However, by 2019, it has rapidly become the largest cryptocurrency bank in the United States, with the world’s top 1,600 cryptocurrency miners, exchanges and custodians depositing and transferring billions of dollars each month.
Deposits surged from about $2 billion in 2020 to more than $10 billion in 2021. By this year, total assets he had soared to $16 billion. Just 10 months after listing on the New York Stock Exchange in late 2019, Silvergate’s stock price has soared from $12 a share to more than $200.
“This was a small real estate lender who went all-in on crypto,” said one former employee. “It was completely bizarre.”
But the roller coaster came to a sudden halt last week, with the U.S. Senate investigating Bankman-Fried’s FTX failure, which has been accused of mishandling deposits from customers who are now facing losses of up to $10 billion. Silvergate caught in the crosshairs of lawmakers.
According to a letter from a U.S. Senator to bank chief executive Alan Lane, Silvergate “seems to be at the heart of how money moves within Bankman-Fried’s crypto empire.” It looks like “. Failing to detect such a “scheme,” said Silvergate, may have violated anti-money laundering laws.
Last week, Lane attempted to address market concerns about links to FTX in an open letter accusing short sellers of spreading “speculation” and “misinformation.” He said the bank has conducted “significant due diligence on FTX and its related entities.”
Silvergate has quietly removed the glowing tribute to Bankman-Fried from its website, along with all references to former clients. The FTX collapse wiped out two of his top bank customers. About 10% of Silvergate’s total assets belonged to his FTX, whose clients also included cryptocurrency lender BlockFi, a major victim of the Fallout. According to the bankruptcy filing, FTX and its “affiliated entities” held about 20 different accounts at Silvergate.
Banks have until December 19th to respond to the letter and provide a “full description of their relationship with FTX.”
A 60-year-old devout Catholic living in Temecula, California, and the grandfather of more than 20 children, Lane has been the mastermind behind a remarkable shift in Silvergate’s strategy over the last few years.
When Silvergate founders Dennis Frank and Derek Eisele were hired in 2008 when the bank was struggling, Lane planned to turn it into a full-service commercial bank, close to the business. People say He had previously been around a series of small regional banks.
However, in 2013, Lane started dabbling in cryptocurrencies. Bitcoin, a then-four-year-old technology, had a record run that year, almost jumping 7,000% to break his $1,000 mark for the first time ever. Cryptography was slowly beginning to gain mainstream recognition.
“We needed deposits and Alan started noticing companies like Coinbase were being forced out of the banks,” said Lane in 2016 to help strengthen his cryptocurrency strategy. said Ben Reynolds, former president of Silvergate. “So the idea was that if you could put your bank on Coinbase, you could find a deposit. , they replied OK.”
Worried about emerging asset classes linked to money laundering and illegal drugs, major financial institutions have begun refusing bank transactions to cryptocurrency exchanges and blocking customers from sending money to buy cryptocurrencies. rice field. Traditional banks were also not set up for crypto traders who needed to be able to transfer money over the weekend.
Recognizing gaps and inefficiencies in a rapidly growing market, Lane and Reynolds seized the opportunity, according to former employees. “The founders of Silvergate were both realtors, [the change in direction] Because it makes money. ”
Over the next six years, Lane and Reynolds sold Silvergate’s business banking team and streamlined the real estate group. The cryptocurrency customer base has grown from around 20 in 2016 to more than 1,000, including Xapo, Paxos and Bitfury, and management has expanded its balance sheet to include launching stablecoins and structuring loans against cryptocurrencies. I started looking for riskier ways to harden.
In 2017, we launched the Silvergate Exchange Network (SEN). This allows a crypto investor to instantly transfer USD from his bank account to the crypto exchange 24/7, as long as both the exchange and the investor are banking on his Silvergate. It’s a platform that lets you
And in March of this year, Silvergate issued a $200 million loan to a company owned by American crypto billionaire Michael Saylor.
“Alan saw this opportunity in cryptocurrencies that I still didn’t fully understand and built it into quite a few operations,” said his mentor and former Silvergate boss, Silvergate. Investor Frank Mercadante said.
But it came with risks. According to two of his people who worked there, Silvergate had to employ twice as many compliance his staff as a bank of similar size. It usually takes him six months for a new cryptocurrency exchange to open a bank account. “The main risks are knowing your customers and anti-money laundering, which were taken seriously in 2014” — when Silvergate got its first crypto client — one of the people involved Told. In June 2021, Silvergate ended its relationship with the world’s largest cryptocurrency exchange, Binance, for undisclosed reasons.
“Cryptocurrency was a small new thing when they came in. I don’t think they expected it to take off so quickly,” said a person close to the business. “So they turned all their chips in that direction. It ran away from them and got big very quickly.”
As Congress chooses Silvergate’s relationship with FTX, banks will be forced to consider exposure to an unregulated industry where the risk of fraud and bad actors appears higher than ever .
“Banks have no responsibility to prevent transactions between legitimate-looking entities,” said one person close to Silvergate. There is no requirement that you have to maintain a segregated account with
Silvergate’s stock price is half what it was before the FTX collapse, and is down nearly 85% this year, but at $23, it’s almost double its IPO price. Banks face great uncertainty about digital deposits, down 60% this quarter, according to Morgan Stanley analysts. “The demise of FTX could also pose the risk of lawsuits and headlines across the crypto ecosystem,” they added.
“We were planning for a year that would challenge the current environment, but we’re trying to accept what happened,” said Reynolds. “We have to ask these questions where digital assets go from here. This is a huge reputational issue for the industry. Those are the questions we are asking.”
