It’s been a long journey for Alan Lane since the Silvergate Bank CEO bought his first bitcoin in 2013.
That was around the time his small, deposit-hungry bank, based in La Jolla, California, took on its first crypto exchange as a client. It was a gutsy move for a financial institution, since at the time most bankers viewed bitcoin as either a fad, a scam or a reputational and regulatory risk – if they had even heard of it all.
Speaking Friday at the BlockFS conference in New York, Lane recalled:
“Here were these companies that were raising money from reputable [venture capital] firms. They weren’t doing anything illegal, they weren’t doing anything immoral. And yet, they were struggling to maintain bank accounts. So I put our need for deposits together with their need for banking services.”
Five years later, Silvergate is arguably the leading bank for crypto startups in the U.S. Prominent exchange clients include Coinbase, Gemini, Kraken, and bitFlyer. And as revealed in the bank’s initial public offering prospectus, filed earlier this month, the bank now works with 483 crypto startups that contributed roughly $1.7 billion in deposits to the balance sheet as of Q3 2018.
To overcome the crypto-phobia that to this day has held back most of Silvergate’s peers from serving the sector, Silvergate invited exchange executives to meet directly with the bank’s regulators, Lane said during a panel discussion on banking bitcoin startups.
Even in the early days, he said, he was only interested in working with startups that had professionals with legal expertise from the traditional financial world and were wholly dedicated to the nitty-gritty of daily monitoring for ironclad compliance.
At the time, most crypto startups in those days had executives juggling diverse responsibilities, which was not going to cut it for a bank or its regulators. “The chief compliance officer is not a multiple-hat type of person,” Lane said.
The Coinbase Club
During the same panel, Nick Rosenberg, director of IT at the Metropolitan Bank in New York, said his institution –– one of the very few to compete with Silvergate in the space –– is aggressively pursuing a diverse range of crypto startups.
But Lane said Silvergate has narrowed its focus over the years to almost exclusively serve exchanges, over-the-counter trading desks, and institutional investors.
In reference to both Silvergate and Metro sharing Coinbase as a mutual client, Lane said:
“Coinbase is probably the most well-banked company in the ecosystem. Coinbase probably banks with us and every other bank doing this on purpose.”
Lane said this may be the remnant of a popular strategy from the early days, when crypto companies developed relationships with multiple banks in case one gets shut down.
To distinguish itself from a client’s other banks, Silvergate integrates with exchange platforms’ APIs so that institutional investors with Silvergate accounts can instantly make trades or deposits 24/7, even if the bank is closed.
This also offers some peace of mind for those investors that they’ll be able to get their money out, in fiat form, in a hurry.
“That’s equally powerful on the way out, on the off-ramp,” Lane said. “Because we’ve all heard of exchanges being hacked.”
The availability of data from a public ledger has helped Silvergate to get comfortable serving a sector long associated in the public mind, rightly or wrongly, with nefarious activities.
In the early days, Silvergate set up a process for ongoing monitoring that matched up deposits with bitcoin blockchain data. Up until today, Lane said his staff might make quarterly visits to exchange offices to make sure they have the most up-to-date monitoring tools across blockchain-based assets, in addition to daily monitoring and routine communications.
“We wanted to be able to see both sides of that [bitcoin] transaction,” Lane said. “When you wire $50,000, send us the blockchain address…what we want to see on the blockchain is a transaction that matches up with that $50,000 value.”
Silvergate often applies the same meticulous approach in requiring its clients’ use external auditors for assets like dollar-pegged stablecoins – which Gemini and Coinbase have both launched in this year – to make sure fiat deposits match up with exchange records.
Although Lane said he originally scoffed at the phenomenon of cryptocurrencies designed to hold their value with fiat, his bank is now “looking into stablecoins” to learn more.
Speaking to why Silvergate is slow and selective when onboarding new crypto clients, he concluded:
“It’s really important that it’s done right because if we have something illegal that goes across our platform, it could be detrimental to our business and to the integrity of the system. So we’re very protective of what we built.”