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Silvergate's growth continues thanks to SEN, but it's looking to Diem for future expansion

Quick Take

  • Banking company Silvergate posted another round of strong quarterly results on Tuesday, with CEO Alan Lane attributing much of the success to the SEN platform.
  • Though the opportunity has yet to materialize, Silvergate is hoping its new deal with Diem will present opportunities for monetization in the stablecoin space.
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Silvergate posted another round of strong quarterly results on Tuesday morning — and the market took notice. Silvergate stock jumped 15% since today's opening, currently sustaining around $97.60.

The firm nearly doubled pretax income compared to last quarter, according to CEO Alan Lane. 

"Our success continues to be driven by strong demand for our digital currency solutions powered by the Silvergate Exchange Network, or SEN," said Lane. 

Indeed, the transfer service generated more than $239 billion in volume during the second quarter of 2021, equating to a 44% increase from Q1 2021. That also drove average deposits from digital currency customers to new heights, according to Lane. Average deposits jumped from $3.5 billion to $9.9 billion during the most recent quarter.

"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 while ensuring we have ample liquidity to support our customers as they transact on the SEN," he said.

Though SEN is its main driver, it also appears to be an overall good time to be a crypto-friendly bank. Signature Bank also posted its earnings on Tuesday, disclosing it now has nearly $20 billion in deposits coming from the digital assets industry. Crypto drove about 50% of its quarter-to-quarter growth.

Silvergate's digital currency fee income rose 59% since last quarter to $11.3 million. This can be attributed to increased volume on the SEN and related cash management for foreign exchange services from digital asset customers, according to the bank.

Despite Silvergate's interest in building out so-called "stablecoin infrastructure," transaction fees for minting and burning stablecoins didn't play a role in the growth. 

"Transaction fees for minting and burning stablecoins were immaterial this quarter," said CFO Antonio Martino. "But as Alan [Lane] mentioned, we are well-positioned to benefit from the growing use cases for stablecoins over time."

Silvergate is hoping one such avenue is its deal with Diem, the stablecoin project out of Facebook. The project left Switzerland for the U.S. in May of this year, announcing it would work with Silvergate to issue its long-awaited USD-backed token. 

Diem — formerly known as Libra — has infamously moved in fits and starts, and with an eventual stablecoin delayed thanks to an array of regulatory concerns coming from every stage, global and stateside. Lane said the collaboration is still in the "very early innings" and "novel products like this often require regulatory dialogue."

Still, Silvergate believes it will be a fruitful endeavor, saying the bank is "well-positioned to benefit from multiple levers for monetization." This can come from minting and burning, generating a yield on reserve deposits. Silvergate also plans to add traditional banking services for SEN customers. It's still too early to nail down details surrounding how exactly that monetization will occur, according to Lane, but Silvergate plans to hold the reserves on balance sheet, meaning the bank would also earn a yield on the reserve itself in addition to other income generators. 

Silvergate may have made the Diem deal, but it isn't the only one getting in on the stablecoin game.

Mastercard announced Tuesday that it partnered with Circle to trial USDC settlements. Earlier this year, Visa inked a partnership with the stablecoin company. Lane said as the field of providers grows, Silvergate actually stands to benefit from the competition due to the SEN. 

"Specific to the SEN, we don't really see these types of announcements as having any negative impact on what we do specifically because our use case here with the SEN is specific to providing liquidity, capital efficiency, reducing the banking friction for exchanges and institutional investors," said Lane. 

 


© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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