The crypto bank Silvergate Capital (SI +0.00%) has been looking to launch a dollar-backed stablecoin for some time now.
Stablecoins are digital currencies pegged to a currency or a commodity. The goal is to take the benefits of a digital asset and its efficiency in the payments ecosystem and remove the volatility that often accompanies various cryptocurrencies.
Silvergate Capital delayed its stablecoin initiative in 2021, and on its recent third-quarter earnings call it said that it will not be able to launch a pilot this year, either, as initially promised. Is the project now dead in the water?
What is Silvergate's stablecoin initiative?
Silvergate is a regulated bank but far from traditional in that it mainly operates in the crypto industry. The bank was the first to develop a real-time payments system, specifically for crypto trading called the Silvergate Exchange Network (SEN).
Crypto exchanges and institutional traders can use SEN to transact instantaneously 24 hours a day and seven days a week, solving a pain point in crypto trading because cryptocurrencies trade around the clock and the U.S. banking system does not operate in real time. Silvergate is also the transactional bank for all of the regulated stablecoin issuers.
Image source: Getty Images.
But Silvergate has long wanted to develop its own stablecoin that it could mint and burn from SEN, which could be a game changer for the bank. Its technological capabilities for releasing a stablecoin strengthened when the bank acquired the Diem technology that Meta Platforms had built to try to create its own stablecoin, which Silvergate was supposed to be the exclusive issuer of.
The launch of a stablecoin could be a massive revenue generator for Silvergate because the bank would manage the reserve deposits backing the stablecoin, which could be a huge source of free funding that it could then potentially deploy into interest-earning assets.
While there are other stablecoins already, Silvergate's would arguably be the most regulated, considering Silvergate is a bank and therefore has several different regulators and many regulations it must abide by.
Its chief strategy officer, Ben Reynolds, said on the bank's recent earnings call that the current combined market cap for major stablecoin issuers is around $150 billion. But most stablecoins are really being used for digital currency trading right now. Silvergate wants its stablecoin to be built more around commerce, which could be a much, much bigger opportunity.
What's the holdup?
One piece of good news is that with SEN and the Diem technology assets in place, Silvergate appears ready to launch from a technology perspective. CEO Alan Lane recently assured analysts that the delay is "certainly not a technology issue ... the technology that we acquired earlier this year was ready to go when we acquired it."
Furthermore, expenses have increased 48% year over year, management said, primarily due to "ongoing investments related to strategic growth initiatives," which is presumably related to the stablecoin initiative. I don't think the bank would continue to spend like this if it wasn't serious about an eventual launch.
Lane even said on the earnings call that the bank continues "to build the operational muscle internally, the regulatory compliance muscle" for the stablecoin initiative.
OTC: SI
Key Data Points
The unfortunate part of this is that it means the bank is likely still struggling to get the green light from regulators. Meta abandoned its stablecoin plans due to issues with regulators, although its issues likely had more to do with the fact that it was a massive tech company. In fact, rumors suggested that Meta had actually partnered with Silvergate to be Diem's exclusive issuer in order to appease regulators.
But it still seems like Silvergate is dealing with regulatory issues. Federal Reserve Chairman Jerome Powell recently said at a conference that the Fed should lead the charge when it comes to regulating stablecoin issuers.
Based on Reynolds' comments, it would seem that regulators are being cautious about rolling out a stablecoin to be used at scale for commerce. Reynolds said some of the questions being discussed right now are the risk-based approach that would need to be in place for a venture like this, how to ensure users can exchange a stablecoin for a dollar, and how to ensure there are appropriate protections for the consumers using these tokens.
Will Silvergate launch a stablecoin?
I still think Silvergate is ultimately moving in the right direction and headed toward an eventual stablecoin launch. The constant delays are concerning because they are reminiscent of what Meta dealt with before abandoning the project.
But when you think about some of the issues Lane and Reynolds raised, it does make sense that regulators are proceeding cautiously. I don't think the need for stablecoins and their potential application for commerce is going away anytime soon. Furthermore, regulators have previously said that they think commercial banks should be the main players to issue stablecoins because they are highly regulated.
So I think Silvergate will eventually get there, but the bank is not going to jump the gun until it has a clear signal from regulators. It won't want to have to start and then stop the project.
In my opinion, Silvergate's dollar-backed stablecoin is far from dead -- it's just going to take longer than we all want for it to launch.
