Silvergate Capital (SI), a top bank providing crucial behind-the-scenes services to cryptocurrency investors, recently acquired the crypto project Diem from the Diem Association, the crypto group Meta (META 1.13%) (formerly Facebook) has been taking the lead in.
Facebook's lead in the crypto project was announced back in 2019 under the moniker Libra, but that effort met with stiff opposition from government regulators around the world.
Silvergate has now acquired the assets, paying the Diem Association $50 million in cash and issuing just over 1.22 million shares to the group, for a total price tag of $182 million as of the deal's announcement on Jan. 31.
Given the equity Diem gets in Silvergate for selling its assets, the association will still have some indirect play in the crypto business. But under Silvergate's purview, this crypto project could have a much greater chance of success than the Diem Association was able to achieve. Here are three reasons.
1. Meta already did some heavy lifting
The Diem assets include a blockchain (a digital ledger used to record transactions and distributed to all users in the network), plans for a cryptocurrency built on the blockchain, and operations infrastructure and software for managing the assets. Specifically, the crypto has been designed as a stablecoin backed by a reserve asset -- in this case, the U.S. dollar.
In commenting on the sale of Diem, Stuart Levey, the project's chief executive officer, said that "a senior regulator informed us that Diem was the best-designed stablecoin project the U.S. government had seen." This could be a potent combination once paired with Silvergate's own financial-services technology for the crypto industry. Though the Diem Association ran into regulatory problems that prevented it from launching Diem, it did put in substantial work that could now be put to even better use by Silvergate.
2. Silvergate already has a bank charter
Though Diem's technology appears ready to go, the association that Meta helped form faced substantial regulatory opposition almost immediately upon the official announcement of the project in 2019.
Concerns ranged from the overall unregulated status of the cryptocurrency, the potential to use the stablecoin for money laundering, and a stablecoin undermining the stability of existing financial systems maintained by federal governments and their central banks. Levey released a statement saying that it "became clear from our dialogue with federal regulators that the project could not move ahead."
Silvergate might be able to clear some of these hurdles, though, because it already has a bank charter. In the U.S., a charter outlines a bank's operations and is issued at either the state or federal level. Silvergate is a California-chartered commercial bank, and it's also a member of the U.S. Federal Reserve System. That gives it the ability to hold customer deposits, issue loans, and provide other banking services, which are crucial day-to-day functions that prevented Diem from forging ahead under Diem Association.
Having a bank charter in and of itself isn't a green light for any bank to start operating a blockchain, stablecoin, and financial services using them. But it is a big step in that direction. For example, the Office of the Comptroller of the Currency, a bureau of the U.S. Department of the Treasury, recently stated that banks "must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities."
With a bank charter already in hand, Silvergate may have a much easier time than the Diem Association did in demonstrating its ability to properly manage Diem.
3. Silvergate already has crypto banking customers
Another problem Diem ran into was attracting and holding on to partners. Notable companies that left the project early on included Visa (V -0.65%), Mastercard (MA -0.28%), PayPal (PYPL -1.26%), and private fintech Stripe.
Silvergate, on the other hand, already has quite a few crypto customers via its Silvergate Exchange Network (SEN), which allows for 24/7 settlement of client funds in U.S. dollars. Given that crypto markets never close, this is an incredibly important feature for institutions that invest in and trade cryptocurrencies.
SEN handled $787 billion in transfers in 2021, and Silvergate said it had 1,381 digital currency customers at the end of the year (compared to 969 at the end of 2020).
Having existing crypto customers could give Silvergate a leg up in quickly monetizing Diem. Chief Executive Officer Alan Lane said, "Through conversations with our customers, we identified a need for a U.S. dollar-backed stablecoin that is regulated and highly scalable to further enable them to move money without barriers." Silvergate thinks it can get this stablecoin up and running sometime in 2022.
Given Diem Association's run-ins with regulators, it isn't surprising that it is parting ways with its cryptocurrency project. But Silvergate has some advantages that could improve the odds of success. This could be a top stock to consider if you're interested in investing in cryptocurrency and blockchain technology.
Editor's note: This article has been corrected to say that Silvergate Capital acquired the crypto project Diem from the Diem Association, the crypto group Meta Platforms has been taking the lead in.