Banking Services for Digital Currency Industry

KEY TAKEAWAYS

  • 85% of Silvergate deposits come from the digital currency industry.
  • The cost of funds is negligible as deposits from the digital currency sector are non-interest bearing.
  • Silvergate establishes Silver Exchange Network for cross-exchange transfers and offers Bitcoin-collateralized USD loans.
  • A growing number of banks are treading the footsteps and eyeing to enter the digital currency industry.

The race to take a slice of the crypto market boom is real. While payment gateways express strong interests in the cryptocurrency industry, commercial banks are extending their services to crypto-related businesses, despite a long tradition of somewhat acrimonious relationship with digital money. 

Silvergate, a California-based bank, introduced digital currency services in 2013. It primarily provides banking access to digital currency firms, including digital currency exchanges, institutional investors, blockchain-related projects, miners, etc. Silvergate was listed on the New York Stock Exchange in November 2019 and became one of a handful of U.S. banks serving digital currency businesses.

To date, Silvergate has served some of the biggest names in the industry, including Coinbase, Bitstamp, Genesis Trading, Polychain Capital, Paxos, Circle, to name a few. As of March 31, 2020, the bank has 850 digital currency clients, including 61 digital currency exchanges, 541 institutional investors, and 248 other customers ranging from blockchain projects, miners, stablecoin, and other digital currency service providers. The majority of well-known stablecoin issuers in the United States are working with Silvergate. It is still uncertain if Libra will join the club. 

Silvergate has developed the Silver Exchange Network (SEN), an internal bank network to better serve the digital currency community. It allows commercial customers to move U.S dollars between different digital currency exchanges instantly, thus enhancing capital efficiency and providing the opportunity to trade various asset classes 24/7.  The deposits are kept within the Silvergate system during customer-to-customer transfers. In 20Q1, SEN handled over 31,000 transactions, and the total volume amounted to $17.4 billion. 

As of March 31, 2020, digital currency deposits make up 85% of Silvergate’s total deposits. The average balance of Silvergate’s deposits from digital currency exchanges hardly changed in 20Q1 compared to 2019. However, deposits from institutional investors increased significantly in 20Q1 by 36%, owing to a rush for cash spurred by the extremely volatile market condition in mid-March.

Source: Silvergate, Bybit Insight

What motivates Silvergate to venture into a field where few financial institutions dare to tiptoe? Silvergate deposits from the digital currency industry are non-interest bearing, which significantly lowers the bank’s cost of funds. It’s essentially free funding on which Silvergate can easily earn an interest spread.

Silvergate also rolls out a new USD loan product against Bitcoin collaterals in 20Q1, dubbed the SEN Leverage Loan. SEN Leverage boasts a Bitcoin-on-margin lending feature that allows Silvergate customers to borrow USD collateralized by Bitcoin held at partner digital currency exchanges. Silvergate has approved $12.5 million in Bitcoin collateralized loans in 20Q1, which is believed to be a key growth driver.  

Fee income from digital currency customers increased from USD 0.7 million in 18Q4 to USD 1.7 million in 20Q1, constituting 8.5% of Silvergate’s total interest income. The surge in transaction activities from digital currency customers is attributed to growing demands for Silvergate’s cash management solutions, forex services, and deposit solutions.

However, the cost of deposits rose from 0.08% in 18Q4 to 0.87% in 20Q1, due to heightened competition. Other commercial banks have expressed their intentions of stepping in and offering better yields. The Metropolitan Commercial Bank in New York, another digital currency friendly bank, is among the first to feel the pressure as its deposits dropped by half in 2019. Similarly, Silvergate’s average currency deposits in 20Q1 did not increase, but the costs from interest-bearing deposits increased considerably.

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Source: Silvergate, Bybit Insight

Silvergate Bank, Signature Bank, Metropolitan Commercial Bank, and Cross River Bank have made their names in the digital currency community. And a growing number of banks are treading their footsteps. Leveraging on the expertise and the infrastructure of the mainstream financial institutions, the digital currency industry will also stand to prosper.