Silvergate Took $4.3B in Deposits From Digital Currency Customers in Q2

Silvergate Bank accepted a whopping $4.3 billion in new deposits from new and existing digital currency customers in second-quarter 2021, according to an earnings report released Tuesday.

Most came from crypto exchanges, which deposited $2.4 billion in cash during the quarter. Institutional investor deposits grew by $1.8 billion and those from other customers by $100 million. The La Jolla, Calif.-based bank, which serves major crypto firms such as Coinbase, Gemini and Kraken, added 120 digital currency customers for a total of 1,224.

Crypto firms are often a rich source of low-cost deposits for the few banks that openly serve the sector. Silvergate’s average cost of deposits was 0% in the three months through June, compared with 0.37% in the year-earlier quarter. For scale, average deposit costs for mid-cap commercial banks are normally around 0.75% to 1.25%.

See also: Goldman Sachs Starts Coverage of Silvergate Capital With Neutral Rating

The Silvergate Exchange Network (SEN), a fiat on-ramp for bitcoin markets, processed 137,947 transactions and transferred $239.6 billion over the network during the last quarter.

In its earnings call on Tuesday, the bank provided investors with an update on how it was monetizing the deposits that are being held with Silvergate because of its exchange network.

“In the second quarter, average deposits from digital currency customers grew by $3.5 billion to $9.9 billion,” Silvergate CEO Alan Lane said. “Driven by the record volume we experienced on this, we are prudently deploying these deposits into interest earning assets, including the purchase of $4.5 billion of both short and long duration securities during the quarter.”

Adding deposits to the bank’s balance sheet makes it harder to maintain high capital reserve ratios, and the bank’s stock analysts have pushed it to do more with the deposits it has. The bank’s Tier 1 leverage ratio – which measures equity capital against risk-weighted assets – remained well above the regulatory threshold of 5% at 7.9% this quarter but under the 9.68% level it was at in the first quarter of this year.

Lane also addressed the deposit growth that would come from being the exclusive stablecoin issuer for Facebook’s Diem project.

“We are looking at our capital needs and anticipated growth to be capital efficient and having runway to support that growth,” Lane said. “We’re also looking at off balance sheet mechanisms to take on that growth that might come from a stablecoin project like Diem.”

The international expansion of Diem will depend on how well the bank can enable Diem redemptions in other jurisdictions, said Silvergate EVP of Corporate Development Ben Reynolds. The project will need banks or money services businesses that can move dollars from the blockchain and convert them into local native currencies, he added.

“We’re pretty excited about the work that we’ve been doing in foreign exchange,” Reynolds said. “Over the last couple of years, setting up those relationships with like-minded banks around the globe.”

Silvergate plans to profit off of the transaction fees on minting and burning Diem’s stablecoin, yield on the reserve deposits from Diem, and on offering traditional banking services to customers that come to the bank through Diem. This past quarter, Silvergate raked in $11.3 million in fees from digital currency customers, up 59% from the previous quarter.

The bank saw approved credit lines that totaled $258.5 million in its bitcoin-backed loans product called SEN Leverage (which functions like margin lending for institutional investors). The bank is still seeing growth in that product, but it’s been slower in the latest bitcoin downturn, Lane added.

Lane said that the bank has “entertained” offering SEN Leverage loans to customers outside of its institutional investor base but added that the bank has chosen not to because it doesn’t want to get trapped into “one-off loans.”

“We certainly are open to other opportunities,” Reynolds said. “For example, if treasuries start adopting bitcoin on the balance sheet more, then the need for financing could grow, and that would be something that we would consider.”