Silvergate Bank Eyes Crypto-Backed Loans for Institutions

Silvergate Bank, one of the cryptocurrency industry's few go-to financial service providers, is planning to become a crypto lender.

According to an updated IPO filing, Silvergate, which serves some of the cryptocurrency world's top firms like Coinbase, Bitstamp, Genesis Trading, Blocktower Capital, Polychain Capital and Xapo, has seen increased demand from the industry and is aiming to become an even more crypto-focused institution.

In particular, the bank is planning to offer fiat loans, collateralized with crypto, to institutional clients as a part of the Silvergate Exchange Network (SEN) – a payment system specifically designed for crypto exchanges and their big clients.

Allowing institutional clients of crypto exchanges to use fiat while not touching their crypto balances on the trading venues would be beneficial both for Silvergate and for the industry, the prospectus says:

"This solution provides greater capital efficiency for institutional investor clients that wish to transact without needing to move liquidity on and off different exchanges. ... Offering lines of credit would also improve liquidity within the order book of our exchange clients, enabling additional trading on their platforms, potentially reducing pricing arbitrage across exchanges and improving the stability of digital currencies."

Such loans would be funded from Silvergate's own balance sheet, and if the crypto collateral's price should fall, the bank can go to one of its exchange clients and sell the assets. The company believes the risk of issuing such loans will be "appropriately compensated, ... earning attractive risk adjusted returns."

Silvergate is also looking into including stablecoins in its payments infrastructure, although the bank is not directly involved with any stablecoin issuer at the moment. However, it already holds U.S. dollar deposits backing "multiple stablecoins," the document says.

The bank also reported notable growth of its client base in 2019. As of June 30, Silvergate had 655 "established and emerging digital currency industry customers," compared to the 542 reported in December 2018 – a 20-percent increase over six months and 55 percent over the year.

Another 228 clients are in the process of onboarding. People and companies building and supporting crypto infrastructure, such as software developers, miners, custodians and "general industry participants" account for 27.2 percent of Silvergate's crypto customers, the filing says.

The bank's income has been growing along with the number of crypto clients. Net income has gone up by 81.6 percent since last June, from $8 million to $14.6 million, the firm indicates. Transfers via SEN also soared to $12.7 billion-worth, compared to $8.3 billion during the entirety of 2018. That figure notably exceeds the value of transfers for non-crypto customers, which is disclosed at $11.2 billion for 2019.

Previously, Silvergate said it planned to seek New York state's "BitLicense" in order to launch a limited liability trust company and becoming an institutional crypto custodian. It said in the earlier filing:

"Our growth strategy contemplates the establishment of a qualified custodian entity as a Company subsidiary to address this market opportunity."

Silvergate CEO Alan Lane image via CoinDesk Consensus archives