The crypto bank Silvergate Capital (SI 9.76%) reported strong quarterly earnings results for the first quarter of 2022, beating analyst estimates on earnings and revenue and seeing some nice customer growth as well. A big part of Silvergate's story is the bank's stablecoin initiative, in which Silvergate eventually plans to launch a U.S. dollar-backed stablecoin for commerce and remittance purposes. Silvergate plans to mint and burn this stablecoin on its proprietary real-time payments network, the Silvergate Exchange Network (SEN). Let's take a look at where things stand after the first quarter.
Not ready yet but moving along
The big takeaway from management's recent comments on its Q1 earnings call is that significant effort is being made on the stablecoin initiative, but there is still no clear date for the launch of the pilot, although management reaffirmed previous comments that it hopes to start a pilot this year.
In the quarter, management said Silvergate closed its previously announced acquisition of the Diem assets from Meta Platforms, which the bank had been working with on the stablecoin initiative before Meta's decision to bow out. These assets include development, deployment, and operations infrastructure as well as tools for operating a blockchain-oriented payments network that can facilitate payments for commerce and cross-border remittance. Silvergate expects the integration of Diem assets into SEN to cost about $30 million in 2022, roughly $8.4 million of which has already been incurred.
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Silvergate's Chief Executive Officer Alan Lane during the first-quarter earnings call said the bank views stablecoins as a potentially "meaningful payment rail for consumers and businesses around the globe." Although there are other stablecoins in existence, Silvergate's value proposition is that it's a highly regulated, insured depository institution. "We know that our customers have a need for a U.S. dollar-backed stablecoin that is regulated and highly scalable to further enable them to move money without barriers," Lane added.
Management at Silvergate still seems to be working through several issues related to the initiative. For instance, as the issuer, Silvergate plans to manage the reserve deposits that back the stablecoin. If the currency takes off, this could create a large influx of stablecoin-related deposits and swell the bank's balance sheet. Banks must maintain several regulatory capital ratios, and a fast-growing balance sheet can impact these. More deposits also increase the deposit insurance fees that banks pay the Federal Deposit Insurance Corp (FDIC).
Lane said there is still a question over whether reserve deposits from stablecoins will be treated in the same way as traditional deposits on the bank's balance sheet and therefore have an impact on regulatory capital ratios or require more FDIC insurance. Silvergate has applied for a trust charter from the New York Department of Financial Services to give the bank off-balance-sheet optionality for these potential reserve deposits and to be able to manage them in a capital-efficient manner.
This could be a major catalyst
Although there wasn't much news on the stablecoin initiative, Silvergate management seems to be investing heavily and thinking very carefully about how to launch the initiative in a prudent manner. While it doesn't look like anything super meaningful will happen this year, given the effort and resources being put into the initiative, I am confident management will roll it out as soon as it's ready.
Given how stablecoins are growing in popularity and the fact that Silvergate has the potential to offer clients a solution from a highly regulated, legitimate bank, I am watching this very closely, because the launch and success of the stablecoin initiative could be another game changer for an already game-changing bank.
