- Silvergate Bank has more than 480 digital currency customers, with 145 in the pipeline. Strong growth from this customer segment has encouraged an IPO
- The firm has a strong moat around its business, stemming from and exchange network capable of 24/7 transfers
- The bank is betting big on digital currencies, selling off smaller business lending and retail branch units
Silvergate Capital Corporation, the holding company of startup-friendly Silvergate Bank, filed an S-1 in preparation for an IPO to be underwritten by investment banks, Barclays Capital Inc. and Keefe, Bruyette & Woods, Inc. Based in La Jolla, California, the bank is well-known for welcoming customers that work with digital currencies, in part due to the long-standing passion of chief executive Alan Lane.
Companies and investment firms dealing with cryptocurrencies are often viewed as high risk by financial institutions. Despite the risk profile of many crypto related firms, Silvergate banked some of the earliest startups working in the space, including Gemini, Paxos, bitFlyer, and Kraken, who were turned away by other financial institutions. More recently, the firm has worked with blockchain analysis businesses like Elliptic to help analyze the Bitcoin blockchain and launched the Silvergate Exchange Network, allowing crypto customers to easily transfer balances between them.
Some highlights from Silvergate’s S-1, which includes financial information dated to September 30, 2018:
- 483 digital currency industry customers and nearly 150 more in the pipeline. These customers include miners, exchanges, funds, and custodians.
- $1.7B in non-interest bearing deposits, a 180.7% year-over-year increase (representing 88.2% of total deposits, up from 12.4% in December 2013). Silvergate’s cost of total deposits was 0.11% and their cost of funds was 0.18%, allowing them to re-deploy this capital to capture attractive risk-adjusted returns (including in commercial real estate lending, mortgage warehouse lending, correspondent lending and commercial business lending). The low cost of deposits and funds was driven almost entirely by the expansion of their digital currencies customers, resulting in $14.3M net income for the nine months ending September 30, 2018.
- A large part of their growth is attributed to network effects generated by the Silvergate Exchange Network (SEN), which had over 60% of their digital currency customers. The SEN is a 24/7 network and includes the 5 largest U.S. domiciled crypto exchanges. As crypto markets are global and have no regulated market hours, the SEN is often the only way to move fiat between exchanges and bank accounts in real-time, outside of traditional banking hours.
- Digital currency related investors own approximately 13.1% of the issued common stock of the company. Notably, Digital Currency Group invested in the company earlier this year as part of a February 2018 raise of $107.9m in common equity ($60M of which was equity capital for the Bank).
The company is pinning future growth on expansion in banking fiat-backed stablecoins, exploring a crypto-custody business offering (where it has seen demand), and partnering with a correspondent banking partner to expand internationally. (Source: Edgar)