Bessie Liu

Count Silvergate Capital among the publicly-traded crypto names hit by plunging stock prices triggered by this week’s sudden market downturn.&nbsp;



Silvergate, a digital assets-focused, registered US bank, has drawn the attention of Wall Street analysts, parsing the level of exposure the company had to the digital assets meltdown precipitated by FTX and Alameda Research.



In a strained liquidity environment, financial services firms can be hard pressed to handle mounting withdrawal requests, as was the case with FTX.&nbsp;



FTX is <a href="https://help.ftx.us/hc/en-us/articles/1500004529001-Silvergate-Exchange-Network-SEN-" target="_blank" rel="noreferrer noopener">a Silvergate customer</a> and the bank prominently displays a quote from FTX CEO Sam Bankman-Fried <a href="https://www.silvergate.com/solutions/digital-currency/sen" target="_blank" rel="noreferrer noopener">on the home page</a> of its Silvergate Exchange Network (SEN), in which he calls the bank &#8220;one of the key backbones of the cryptocurrency settlement layer.&#8221;



The bank offers institutional investors bitcoin-backed lending and says it maintains loan-to-value, or collateralization, levels, plus ample cash and short-dated securities like US Treasurys on hand, to permit its customers to cash out at any time.&nbsp;



Even so, Silvergate’s stock plunged <a href="https://www.marketwatch.com/investing/stock/si" target="_blank" rel="noreferrer noopener">23%</a> Tuesday — and by almost <a href="https://www.marketwatch.com/investing/stock/si" target="_blank" rel="noreferrer noopener">85%</a> in the past year.&nbsp;



Although customers have been able to make deposits and withdrawals without interruption, industry participants have posited the potential for a shift if market conditions worsen.&nbsp;



John Popeo, a financial services regulation adviser, said “an uncomfortable topic for both crypto firms and traditional finance firms such as banks is the intersection of crypto and tradfi, and I think we’re going to have a lot more of those conversations as we move forward.”



One source familiar with the matter said Silvergate’s balance sheet is “built” so they “don’t end up in a situation like some of the crypto industry players out there, where they have a liquidity crunch.”



Silvergate CEO Alan Lane said in a statement that the regulated entity uses its balance sheet to “provide liquidity for our clients while maintaining a strong capital position in excess of the well-capitalized status required by federal banking regulations.”



The source said Silivergate has a “highly liquid balance sheet” consisting of $1.5 billion in loans and an estimated $13.5 billion in liquid securities and cash.



Silivergate stocks closed trading at <a href="https://www.tradingview.com/symbols/NYSE-SI/" target="_blank" rel="noreferrer noopener">$32.68</a>, down by $2.01 from the day before.



Michael Bodley contributed reporting.



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Alan Lane

Silvergate Capital Shares Pressured by FTX Debacle

Sam Reynolds

<div id="highlights-block_60f9e31d897c8" class="highlights">
 <ul>
 <li>Silvergate Capital reported earnings Tuesday, with a significant uptick in deposits and volume on its exchange network</li>
 <li>Despite a chill through the digital assets market, volume on SEN Leverage increased by nearly 1,000% during the last quarter</li>
 </ul>
 
</div>



This past quarter’s violent market gyrations, which led to the price of bitcoin falling by nearly 50%, didn’t have much of an impact on demand for Silvergate’s SEN Leverage service according to comments from executives on a recent analyst call. 



Silvergate operates the <a href="https://www.silvergate.com/solutions/digital-currency/sen-leverage.html" target="_blank" rel="noreferrer noopener">Silvergate Exchange Network</a> (SEN) which allows for instant settlement of dollar-denominated transactions. As Silvergate is the only banking partner that will work with many exchanges, SEN allows traders to send capital between exchanges instantly without using SWIFT or FedWire which are both quite slow in comparison.



SEN’s counterpart, SEN Leverage, allows clients to collateralize their bitcoin holdings for dollars should they need to cross-leverage their digital assets into other asset classes.



During its <a href="https://cms.blockworks.co/silvergate-beats-earnings-sen-volume-up-nearly-1000-on-year/" target="_blank" rel="noreferrer noopener">earnings</a> call, Silvergate said that SEN Leverage reported that approved lines of credit had jumped to $258.5 million, up $196.5 million quarter-over-quarter. This isn’t as dramatic an increase as some of Silvergate’s other business lines, but it does reflect continued growth in the vertical.



“We are not really seeing a fall off in demand as it relates to our institutional investor clients,” CEO of Silvergate, Alan Lane, said during an analyst call.&nbsp;



Lane said that with “prices coming down, there just has not been as much recent demand for actual borrowing.”



Ben Reynolds, Silvergate’s Chief Strategy Officer, said during the call that the bank had seen customers keeping more liquidity at Silvergate in the form of deposits than they needed to execute their trading strategies, which led to larger dollar transfers per transaction, but a fewer number of overall transfers.



When asked by analysts if the bank is considering expanding the SEN Leverage product outside of institutional investors, Lane explained that the bank is looking to “leverage the network effects of SEN and continue to press our advantage with that network instead of doing a series of one off loans.”



“That might ultimately end up being somewhat commoditized and really kind of a race to the bottom in terms of someone coming in and saying, ‘well, if you are doing that loan at 7%, we will do it at 6%,’ and it’s the same as with any type of loan product,” Lane said.



Silvergate’s stock is currently trading at $105.32, up 13% on-week.

Alan Lane

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