“How can I contact Silvergate?” a young, dark-haired man in a black hoodie asked frantically at last month’s Consensus conference, a massive gathering in New York City for those interested in bitcoin and its underlying blockchain technology. It was after hours, and Silvergate’s exhibit booth had closed for the day.
The man, one of thousands of people who paid $2,000 for access to the conference, had seemingly broken a sweat tracking down the unassuming booth in search of the man known for bankrolling cryptocurrency start-ups: Silvergate Bank CEO Alan Lane.
He noticed Lane’s stray card sitting on the table, and lit up. “This is exactly what I need.”
San Diego-based Silvergate is a 30-year-old community bank with three branches in southern California. Yet, it has become known as a lifeline for cryptocurrency exchanges and companies that had their accounts closed or were turned down by Wall Street banks wary of an emerging asset with potential ties to money laundering. Even Warren Buffett has expressed his skepticism about bitcoin, calling it “rat poison.”
Undeterred, Lane is one of the most aggressive executives in cryptocurrencies. Alongside the recent surge of interest in bitcoin and its rivals, Silvergate doubled its assets to $1.9 billion last year. The bank now has more than 250 international clients in the industry, drawing new customers by acting more like a 24/7 clearinghouse for cryptocurrency exchanges.
On the surface, the 56- year-old seems much more like a college professor, or a priest, than a wheeling-and-dealing bank executive. During a recent interview, Lane took off his glasses before answering a question he has clearly been asked before: Why would you bet this small bank’s reputation on one of the biggest headline risks of the past five years?
The grandfather of 21, and devout Catholic, said he became interested in cryptocurrency in 2013. At the time, he had been reading about bitcoin and how it might disrupt banking, an industry he had grown to love and started working in when he was a student at San Diego State University. Because of what’s known as “distributed ledger” technology, people could theoretically become their own banks, without the need for third parties, he found out.
“I thought “uh oh, what am I gonna do?” Lane said with a laugh.
The first thing he did was buy some. In his research, he also learned that companies trading bitcoin were being turned down left and right by other banks.
“I put two and two together and I thought, well it might disrupt banking long-term but in the short-term these companies need banks,” he said. “They’re not doing anything wrong. They’re not doing anything illegal or immoral. If they were we wouldn’t be banking them.”
Five years ago, when bitcoin was still at the fringes of mainstream awareness, Silvergate invited in young crypto exchanges and asked them what problems they were trying to solve and how the bank could be helpful.
In order to do business with them as a state chartered bank, Silvergate needed the California State Banking Department on board as well as the Federal Reserve Bank of San Francisco. In the summer of 2014, they brought the two regulators in and put on a presentation on bitcoin.
“That open communication with the regulators early on has proven to be really foundational,” Lane said. “We’re very collaborative with the regulators, we ask them if they have suggestions, and what we can do better.”
Silvergate has a track record of timely reinvention. The bank was founded as a thrift in 1988. Less than a decade later, current Chairman Dennis Frank, an ex-Goldman Sachs banker, reorganized it into a bank.
Frank had left Wall Street during the savings and loan crisis of the late 1980s to buy up failed thrifts through Houston’s Coastal Banc. After selling Coastal in 2004, he moved on to California, where he would recruit investors from his Goldman days to invest in, and re-capitalize Silvergate in 1996.
Under Frank’s leadership, Silvergate stopped its mortgage operations in 2005 before the subprime meltdown. And when the 2008 financial crisis hit, the bank was in a solid position to lend as many other banks were paralyzed by bad mortgages on their balance sheets.
That’s when Frank asked Lane to come in as CEO. By then, Lane had worked his way up in the industry through several executive positions: CFO of Independence One Bank, CEO of Business Bank of California and president of Southwest Community Bancorp. Lane also had a two-year stint as a professor and co-founder John Paul the Great Catholic University in San Diego.
Lane recalled Frank telling him, “I’m a Wall Street guy and I need a banker as a partner, would you join me?”
Silvergate’s ability to stay profitable during the financial crisis meant it had no shortage of lending opportunities, Lane said, but the problem was getting enough customer deposits to fund those loans. Silvergate looked to cryptocurrency companies to fill that gap.
Major Silvergate clients include the Winklevoss twins’ Gemini exchange, Paxos, bitFlyer and Kraken.
David Ripley, COO of Kraken, said in an email, “For the most part, the larger banks in the U.S. have stayed away from banking cryptocurrency businesses. In the U.S. and particularly Europe, we see smaller, more technologically advanced banks partnering with cryptocurrency businesses.”
About half of the bank’s shareholders are betting that crypto is the way to go, too. They and some other investors contributed to $114 million in order to expand Silvergate’s cryptocurrency businesses. Lane said the investors were drawn in as a way to invest in cryptocurrency without looking for the next new token.
“We’ve got institutional investors who traditionally invest in banks, and they just liked this strategy,” Lane said. “They’re looking to get exposure in the asset class via something they understand.”
Silvergate’s willingness to work with cryptocurrency companies is key to the growth of the digital asset industry overall.
“One of the ways governments had tried to make digital currency exchanges harder to operate is to cut off their banking relationships,” said Travis Scher, Digital Currency Group’s vice president of Investments. “It hasn’t always been easy for them to secure [a banking relationship].”
Run by cryptocurrency enthusiast Barry Silbert, Digital Currency Group participated in Silvergate’s latest funding round and invests in about 20 cryptocurrency exchanges globally. Its subsidiary, CoinDesk, was the host of the Consensus conference.
Wall Street banks have been hesitant to take on bitcoin-related clients, and many have banned customers from using credit cards to buy cryptocurrency. Barclays in the U.K. is among the few large banks to offer banking services in the space, and is working with start-ups Coinbase and Circle. Goldman is an investor in Circle.
Apart from money laundering concerns, the crypto market was simply too small for most big banks to notice. Until last year, when bitcoin neared the $20,000 mark, the industry was a blip on the radar of regulators and most investors.
Silvergate “saw this opportunity when others didn’t, to start banking the cryptocurrency companies in the space,” Digital Currency Group’s Scher said. “The bigger banks didn’t want to do this.”
Hesitance from others on Wall Street has opened up the doors for other small regional banks. They include Metropolitan Bank and Cross River Bank in Fort Lee, N.J., which are also working with cryptocurrency companies, according to people familiar with the banks.
But Silvergate appears to have an edge because of how it is using its network of cryptocurrency clients. Rather than just providing a place to store money, the bank has become somewhat of a clearinghouse, facilitating real-time transactions that can otherwise take days.
“Being able to move the payments efficiently is probably one of the biggest things holding back the space,” said Chad Cascarilla, CEO and co-founder of Paxos, which owns cryptocurrency exchange itBit. “One of the difficult issues is not actually moving crypto assets. Moving the payments is the hard part.”
Silvergate customers can transfer U.S. dollars to other Silvergate bank accounts in what’s known as the Silvergate Exchange Network. This network effect helped the bank double its customer base in the first quarter through word of mouth, the CEO said. If a Silvergate customer wants to do business with someone who doesn’t have a Silvergate account, they have to initiate a wire or ACH transfer, which can take longer.
“The primary benefit people see when they’re signing up with us is the ability to participate in the Silvergate Exchange Network,” Lane said. “It becomes really powerful and our clients are the ones reaching out to others saying are you on the network? Are you a client of Silvergate?”
Coinbase, the leading cryptocurrency marketplace in the U.S., did not dispute a report it is working with the bank. Previously, Coinbase was cut loose twice by Silicon Valley Bank, according to Mark Williams, a Boston University professor and a former Federal Reserve Bank examiner.
“Silvergate appears to be the only bank in town willing to sign up cryptocurrency firms whose business attracts those customers who value the privacy such products can provide,” Williams said. “Considering that Silvergate Bank only received Federal Reserve Bank member status in 2012, its level of asset growth is remarkable.”
While Silvergate has benefited from the rapid growth of cryptocurrencies, the bank has not been immune to more questionable issues that have arisen at the same time. In their five years in the space, Lane said the bank had to exit a “handful” of relationships with cryptocurrency companies because of compliance issues.
To ensure quality clients, Lane said they heavily vet companies to make sure they don’t invest in the next fraud.
“There’s always going to be an element that’s out of our control. Our hope is that we’re doing things right on the front end, so that we’re not letting in bad actors, so to speak. Not letting them in through the front door,” he said.
This year, Silvergate plans to more than double its fintech team, which includes compliance, from about 15 people to 40 people, or 20 percent of the total employee count.
The bank also mitigates much of its financial risk by the amount of cash Silvergate has sitting in its accounts, according to Bert Ely, a financial institutions and monetary policy consultant.
“They obviously have very substantial customers that are keeping very big balances in these accounts,” he said. Because it’s so cash-heavy, “Silvergate has sufficient liquid assets to handle a very substantial outflow.”
Regardless of the risks, Silvergate and its customers are in the new asset class for the long haul, betting on an influx of institutional funds that will send cryptocurrency prices climbing again.
Even as bitcoin and other cryptocurrency prices lost more than half their value in the first quarter, Lane said the number of Silvergate clients more than doubled. Institutional clients are generally less “fickle” and reactive than some retail investors, he said.
“When the prices stabilize or go down we don’t see a bunch of money leaving the bank,” Lane said. “They’re sitting there, waiting for next opportunity.”