the bank driving the cryptocurrency boom from a small local lender

It was used by Sam Bankman-Fried to transfer client funds to the digital asset exchange FTX, according to a quote by Sam Bankman-Fried on the San Diego bank’s website: “Life as a cryptocurrency company is You can divide it into before the silver gate and after the silver gate.”

Life as a crypto company can be divided into pre-Silvergate and post-Silvergate. It’s hard to overstate how much blockchain companies have revolutionized banking – SBF

Silvergate is highly unlikely to be responsible for the $40 billion cryptocurrency exchange that filed for bankruptcy last month.

With three locations in Southern California and less than $1 billion in assets, the company operated for most of its 30-year history as a small community lender, specializing in financing small real estate transactions. But by 2019, his 1,600 top cryptocurrency miners, exchanges, and custodians in the world were using it to deposit and transfer billions of dollars each month, quickly becoming the largest cryptocurrency in the United States. became a bank.

Deposits have increased dramatically from about $2 billion in 2020 to more than $10 billion in 2021. By the end of the year, his total assets had grown to $16 billion. Silvergate’s stock price topped $200 just 10 months after he debuted at $12 a share on the New York Stock Exchange at the end of 2019.

Comments from a former employee

“This was a small real estate lender who was all in on crypto.

But it came to an abrupt end last week when US senators investigated the Bankman-FTX bankruptcy.

U.S. Senator Tells Silvergate CEO Alan Lane That Banks “Look At The Center” As To How These Funds Moved Within Bankman Crypto Freed’s Empire If no such “scheme” was discovered, Silvergate said it could have broken anti-money laundering laws.

In an open letter published last week, Lane sought to allay market concerns about his relationship with FTX by accusing short sellers of spreading “speculation” and “misinformation.”he claimed the bank had “We have extensively researched FTX and its related entities.”

A laudatory tribute from Bankman-Fried has been quietly removed from Silvergate’s website, along with all references to former clients. The collapse of FTX eliminated his two of the bank’s top customers.

About 10% of Silvergate’s total assets belonged to FTX, whose customers included crypto lender BlockFi, which was hit hard as a result of the fallout. According to the bankruptcy filing, FTX and its “affiliated entities” had about 20 different accounts with Silvergate.

Banks have until December 19th to provide a “full description of their relationship with FTX” in response to the letter.

A remarkable shift in Silvergate’s strategy over the last few years comes from Lane, a 60-year-old, devout Catholic and grandfather of more than 20 children from Temecula, California.

When the bank failed in 2008, Silvergate founders Dennis Frank and Derek Eisel hired Lane with the intention of turning it into a full-service commercial bank, according to people familiar with the company. He had already turned many smaller neighborhood banks around.

However, Lane began experimenting with cryptocurrencies in 2013. That year, Bitcoin, a new technology that had been around for four years before him, rose nearly 7,000% before he reached $1,000. Crypto gradually became widely known.

Ben Reynolds, who was hired by Lane in 2016 and is president of Silvergate to accelerate its cryptocurrency strategy, said: “So we thought that if we could bank on Coinbase, we could find deposits. We want to provide banking services.”

Concerned about new asset classes linked to money laundering and illegal drugs, major financial institutions began refusing bank transfers to cryptocurrency exchanges, blocking customers from sending money to buy cryptocurrencies. started. Additionally, traditional banks were not designed to accommodate the weekend remittance needs of crypto traders.

According to former workers, Lane and Reynolds recognized the emptiness and inefficiency of the rapidly expanding market and took advantage of the opportunity. He declared, “Two people in the same room exploded.” The Silvergate founders, both of whom worked in real estate, were so profitable that they embraced a shift in strategy.

Silvergate’s business banking team was sold and the company’s real estate division was wound down by Lane and Reynolds over the next six years. Crypto business customers increased from 20 in 2016 to more than 1,000, including Xapo, Paxos and Bitfury, management strengthens balance sheet, including launching stablecoins and structuring loans against cryptocurrencies We began investigating riskier methods for

In 2017, we introduced the Silvergate Exchange Network (SEN). This is a platform that allows a cryptocurrency user to instantly transfer USD from her bank account to a cryptocurrency exchange 24 hours a day, provided that both the exchange and the user are his Silvergate customers. .

Then, in March of this year, Silvergate made its largest foray into Bitcoin-backed US dollar lending by making a $200 million loan to a company owned by American crypto billionaire Michael Saylor. rice field.

Alan’s mentor, former boss and Silvergate investor Frank Mercadante said:

“Alan saw this opportunity in a cryptocurrency that I still didn’t fully understand and incorporated it into my very important business.”

But there were dangers involved. Silvergate had to hire twice as many compliance officers as he did at a similarly sized bank, according to two former employees. New crypto exchanges usually take him six months to open a bank account. “The main risks, customer perception and anti-money laundering, were seriously considered in 2014,” said one of his officials. That’s when Silvergate got its first cryptocurrency client. For unknown reasons, Silvergate ended its partnership with Binance, the world’s largest cryptocurrency exchange, in June 2021.

According to a person close to the company, “When they got into it, I don’t think they realized that crypto was this little new thing and that it would spread so quickly.” They put all their chips in that direction, but they soon outgrew them.

Uncertainties and Risks in the Unregulated Cryptocurrency Sector

As Congress scrutinizes Silvergate’s partnership with FTX, banks will be forced to consider their exposure to the unregulated sector, where the risk of fraud and bad actors appears higher than ever.

According to a person familiar with Silvergate, “banks have no responsibility to stop transactions between legitimate-looking entities.” You don’t need to maintain separate accounts with

At $23, Silvergate’s stock is still nearly double what it was at its initial public offering, but it’s down half as much as it was before the FTX collapse and is down nearly 85% this year. Morgan Stanley analysts say the bank is dealing with a lot of uncertainty about digital deposits, which has seen him down 60% so far this quarter. They continued, “FTX’s collapse could also lead to litigation and headline risks across the crypto ecosystem.”

The current environment has posed challenges to plans slated for the rest of the year. Reynolds said he is still processing what happened.

“We have to ask these questions about where digital assets go from here.

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