Last week, Silvergate Capital (SI 5.38%) announced a partnership deal with Diem Networks U.S. to be the exclusive issuer of the stablecoin Diem USD. Diem was formerly known as Facebook's Libra project, and this will be the first asset issued on its payment system.
For Diem, this is a big step forward on a project that has been in limbo since 2019. For Silvergate, it reinforces the bank's position as a leader in providing financial infrastructure and banking services in the cryptocurrency space.
Facebook-backed Diem makes progress after years of uncertainty
Originally dubbed Libra, the Diem project initially had big financial industry backers, including PayPal, Mastercard, Visa, and Stripe. However, government scrutiny on the project soon followed and those four companies left the project in 2019.
Last December, Libra was rebranded as Diem, and it's currently backed by Shopify, Uber Technologies, Spotify, Coinbase Global, and venture capital firm Andreessen Horowitz, to name a few.
As a stablecoin, Diem is backed by cash or cash equivalents and short-term government securities. Stablecoins can be used for different purposes, but Diem's focus is to improve commerce between customers and merchants and improve cross-border payments.
The system looks to provide financial infrastructure for those 1.7 billion unbanked or underbanked adults around the world. While these individuals have no access to traditional bank services, two-thirds of them do have access to a mobile phone and internet connection. For this reason, Diem's founders believe that it will benefit this underserved market with secure, low-cost, and fast payment services on its network.
According to Accenture, reaching out to the unbanked or underbanked could generate approximately $380 billion a year in revenue in emerging markets across Asia, Africa, and South America. It's a large addressable market and Diem is throwing its hat in the ring.
Diem also hopes to solve cryptocurrencies' problem related to illicit activities. Janet Yellen recently criticized cryptocurrencies, stating: "We don't really have an adequate framework to deal with the different issues that they pose from a regulatory perspective. There are issues around money laundering, Bank Secrecy Act, use of digital currencies for illicit payments, consumer protection and the like." Diem aims to improve on previous cryptocurrencies by ensuring compliance with Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), and other regulatory sanctions.
The deal establishes Silvergate as a leader
From Silvergate's perspective, this is a significant deal, showing the bank as a trusted source in the crypto space. When the bank shifted its business model away from banking and toward cryptocurrency customers in 2013, it wanted to solve a big problem in the industry -- a lack of expert resources to navigate the regulatory uncertainty. Diem CEO Stuart Levey called Silvergate an "ideal partner for Diem." For Silvergate, its position as an expert bank for cryptocurrency customers is reinforced at a time that the bank continues to grow rapidly.
In the first quarter, Silvergate grew its net income to $12.7 million, a nearly 189% increase from last year and up 39% from the fourth quarter. The bank was boosted by increased deposits and deposit fees from digital currency customers. It saw record volume on its Silvergate Exchange Network (SEN), which boasted $167 million in transaction volume, representing a 181% increase since the fourth quarter. This was boosted by its growth in digital currency customers, which increased 14% to 1,104 from the end of 2020.
They say those who made the most money during the California gold rush weren't those looking for gold, but instead those who sold the shovels. This is how I view Silvergate. You could be optimistic about cryptocurrencies as an asset, but uncertain about which cryptocurrency to invest in. If you don't know which one to invest in -- there are thousands, after all -- Silvergate is a good stock that will give you exposure to the industry, especially now that it has established itself as a leading banking provider to cryptocurrency customers.