Silvergate: From a tiny local lender to the bank behind the crypto boom

"Life as a crypto company can be divided into before Silvergate and Silvergate," wrote Sam Bankman-Fried in a quote on the bank's website in San Diego, with which he transferred customer money to his digital asset Exchange FTX.

"It is difficult to overdo how much it has revolutionized banking for blockchain companies."

Silvergate was an unlikely candidate to become the bank behind the 40 billion dollar crypto exchange that has been bankrupt last month.

During most of its 30-year history, it was a tiny local lender who focused on financing small real estate transactions, with three branches in Southern California and a wealth of less than $ 1 billion.

But until 2019 it quickly became the largest cryptocurrency in the USA, with 1,600 of the world's leading crypto miner, stock exchanges and depot banks, which they use to pay billions of dollars every month.

The deposits rose from around $ 2 billion in 2020 to over $ 10 billion in 2021. The total assets had increased to $ 16 billion. Almost 10 months after the listing on the New York Stock Exchange at the end of 2019, Silvergate's share price at $ 12 per share climbed to over $ 200.

"This was a tiny real estate loan who went to crypto all-in," said a former employee. "It was completely strange."

But the roller coaster ride came to a standstill last week when Silvergate came to the crosshairs of the US senators who examined the collapse of Banksman-Frieds FTX, which was accused of abusing customers who are now confronted with losses of up to $ 10 billion.

When they started, Krypto was such a little new thing, and I think they didn't know that things would start so quickly

According to a letter from US senators to the Board CEO, Alan Lane, "Silvergate seems to be the focus", as the funds in the Krypto empire were moved by Bankman-Fried. The failure to uncover such a "scheme" could mean that Silvergate has violated laws to combat money laundering.

Last week,

lane tried to clear out the market for his connections to FTX, in which empty sellers were accused of spreading "speculation" and "misinformation". He said the bank carried out "significant due diligence at FTX and its affiliated companies".

SILVERGATE The glowing homage of Banksman-Fried has traceable from his website, along with all information on his former customer. FTX's collapse wiped out two of the bank's most important customers: About 10 percent of Silvergate's total assets included FTX, and the crypto loan blockfi also included a great victim of the consequences. FTX and its “connected companies” had about 20 different accounts at Silvergate.

The bank has time to answer the letter and to present a “complete record of its relationship with FTX” until December 19th.

lane, a 60-year-old from the Catholic and grandfather of more than 20 children who lives in Temecula, California, the thought leader behind Silvergates is remarkable strategy change in recent years.

Lane, who was hired by the founders of Silvergate, Dennis Frank and Derek Eisele in 2008 when the bank stalled, planned to convert it into a full-service business, people who are close to the company. Before that, he had turned a number of small local banks.

But in 2013 Lane began to deal with crypto. Bitcoin, an up -and -coming, four -year -old technology at the time, had a record run this year and rose by almost 7,000 percent for the first time to over $ 1,000. Crypto slowly started gaining the awareness of the mainstream.

"We needed deposits and Alan began to see that companies like Coinbase were thrown out of the banks," said Ben Reynolds, President of Silvergate, who was hired by Lane in 2016 to advance his crypto strategy. "So the idea was: if we can banks banks, we can find deposits. Alan went to the Federal Reserve and said we want to offer Bitcoin companies basic banking services, and they said OK."

For fear of an up-and-coming investment class, which was associated with money laundering and illegal drugs, large financial institutions refused to transfer and began to block crypto exchanges to block transfers from customers to buy cryptocurrencies. Traditional banks have also not been set up for crypto dealers who have to transfer money at the weekend.

lane and Reynolds recognized the gap and inefficiency on the rapidly growing market and took the opportunity, according to the former employee. "The two in the same room have just exploded," he said. "The founders of Silvergate were both real estate agents, but they loved it [The Change in Direction] because it made money."

Lane and Reynolds sold the Silvergate business banking team in the next six years and reduced the real estate group. Its crypto customer tribe grew out of around 20 companies in 2016, including Xapo, Paxos and Bitfury, to more than 1,000, and his management to explore riskers to strengthen its balance, including the introduction of a stable coin and the structuring of loans against cryptocurrencies.

In 2017 they started the Silvergate Exchange Network or Sen, a platform that made it possible to transfer US dollars from their bank accounts immediately and around the clock to a crypto exchange, as long as both the stock exchange and the investor had bank details at Silvergate.

Then, in March of this year, Silvergate awarded a loan of $ 200 million to a company that belongs to the American crypto billionaire Michael Saylor, the biggest step so far towards the loan lending in US dollars.

"Alan saw this chance in crypto, which I still don't quite understand, and he has installed it in something that is quite an operation," said his mentor, former boss and Silvergate investor Frank Mercadante.

But it was full of risks. According to two people working there, Silvergate had to hire twice as many compliance employees as comparable banks in its size. It usually takes six months for a new crypto exchange open a bank account. "The main risks are know-your-customer and anti-money laundering and these were seriously considered in 2014"-when Silvergate won his first crypto client-one of the people said. In June 2021, Silvergate ended his relationship with Binance, the world's largest crypto exchange for unknown reasons.

"When they started, Krypto was such a small new thing, and I think they didn't know that things would start so quickly," said a person who is close to the company. "So you put all the chips in this direction, it ran away, it got very big very quickly."

While the legislator checks the relationship between Silvergate to FTX, the bank will be forced to examine its commitment in an unregulated industry in which the risk of fraud and poor actors appear higher than ever.

"The bank has no real responsibility to prevent transactions between legitimate -looking companies," said one person near Silvergate. "This sums up that crypto companies are not sufficiently regulated. For example, it is not necessary for someone to have a separate account that only contains customer funds."

The Silvergate share price fell halfway to the collapse of the FTX and fell by almost 85 percent this year, although at $ 23 it is still almost twice as high as the IPO price. According to Morgan Stanley analysts, the bank is faced with considerable uncertainty in terms of its digital deposits, which has so far declined by 60 percent in this quarter. "The decline of FTX could also increase the risk of legal disputes and headlines in the entire crypto ecosystem," they added.

"We had a plan for the coming year, which was questioned by the current environment, and we are still trying to find out what happened," said Reynolds. "You have to ask yourself these questions where the digital assets are going, this is a pretty big reputation problem for the industry, these are questions that we ask."