A crypto bank wants to make money by issuing stablecoins

Silvergate Bank, the crypto bank of publicly traded Silvergate Capital, sees its future in stablecoin – but that future is full of challenges.

Why it’s important: Silvergate’s third-quarter earnings report last week missed expectations, a slowdown in its core banking business a byproduct of the crypto winter. It has to run through it to realize its tokenized dollar future on the other side.

Driving the news: Silvergate last week delayed the launch of its stablecoin, saying it would not meet its goal of launching this year.

• That, and the result in the third quarter, sent the shares down 20%.

What they say: “It’s not a technical issue at this point that’s preventing us from launching, but making sure we get it right with our regulators,” Silvergate CEO Alan Lane told Axios.

• In fact, a bureaucratic traffic jam caused by crypto regulation that is still under construction appears to have factored into the delay. But that hasn’t changed Lane’s view of the strategy.
• “It’s the future,” Lane says, referring to stablecoins.

The big picture: To get there, Silvergate has to overcome more than just regulatory issues – there are also competitive hurdles.

• The $150 billion stablecoin market seems to have its pick of winners, with the top four players taking the lion’s share of the pie.
• Catching up presents another challenge for a crypto bank that has yet to launch one.
• It also needs to figure out how to distribute its stablecoin when it launches.

The intrigue: “Because we’re not a consumer bank, we don’t have a method of broad distribution that a large national bank does,” says Lane. “We have to solve for distribution.”

• Silvergate plans to use another distribution channel by building off Meta’s Diem assets, which the cryptobank acquired earlier this year.
• “Think about a company like Uber, Shopify or Spotify. Any of those platforms, they would be our customers,” Lane says hypothetically. “We would issue the tokenized dollars to them and they would distribute them to those users.”

Meanwhile, The stablecoin legislation targets existing players, opening up the possibility of specific challenges for cryptobanks, Lane said.

• – There is a big focus on how [stablecoin] issuers manage their reserves, and that’s not a necessary focus for a bank,” Lane says, referring to bills that could essentially require banks to do the same, sequestering reserves to another account.

Status: A cryptobank does what any other bank does – takes in deposits and lends those deposits – only it also handles digital assets.

• For now, Silvergate continues to bankroll bitcoin whales like MicroStrategy, and also serves as a transaction platform for stablecoin issuers like Pax and Circle.

• “The unique difference between Silvergate and most banks is that our customers need access to their money 24/7,” says Lane.
• “We provide that access via SEN” – Silvergate Exchange Network, the bank’s payment platform.

Be smart: “We also don’t lend out deposits like a traditional bank would, we have a much lower loan balance,” says Lane, drawing a line between Silvergate and, say, JPMorgan — but also certain bankrupt crypto lenders.

As for the crypto winter, Lane says he had expected lower trading volume. But he also points out that deposits had a “modest fall” compared to the figures in the last bear cycle.

• Deposits were down 12.5% ​​between 2018’s first and second quarters, according to Lane.

What others are saying: “Proportions of [Silvergate] fell sharply during today’s trade after the company’s [third-quarter] The report showed lower-than-expected usage during the quarter of the Silvergate Exchange Network (SEN), Mark Palmer, an equity analyst at BTIG, said in the report last week.

• Of the note: Palmer reiterated his positive assessment on the stock.

What will be next: “[Silvergate is] working behind the scenes – working on the operational muscle and the regulatory compliance muscle so we can launch something,” says Lane.

Bottom line: Maybe a dark horse will win the stablecoin race. Meanwhile, the big companies are competing hard for bigger market shares.