A crypto bank wants to make money issuing stablecoins

Silvergate Bank, the crypto bank of publicly traded Silvergate Capital, sees its future in stablecoin — but that future is laced with challenges.

Why it matters: Silvergate's third-quarter earnings report last week missed expectations, a slowdown in its core bank business that's a byproduct of the crypto winter. It will have to drive through that to realize its tokenized dollar future on the other side.

Driving the news: Silvergate last week delayed the launch of its stablecoin, saying it would not meet its goal of launching this year.

• That, and its third-quarter earnings miss, sent shares down 20%.

What they're saying: "It’s not a tech issue at this point keeping us from launching, but making sure we get it right with our regulators," Alan Lane, chief of Silvergate, tells Axios.

• Indeed, a bureaucratic traffic jam caused by crypto regulation still under construction appears to have factored into the delay. But that hasn't changed Lane's view of the strategy.
• "It's the future," Lane says, referring to stablecoins.

The big picture: To get there, Silvergate will have to overcome more than just regulatory issues — there are competitive obstacles as well.

• The $150 billion stablecoin market would appear to have its pick of winners, with the top four players accounting for the lion's share of the pie.
• Catching up presents another challenge to a crypto bank that has yet to launch one.
• It also must figure out how to distribute its stablecoin once it launches.

The intrigue: "Because we aren’t a consumer bank, we don’t have a method of broad distribution, like a big national bank does," Lane says. "We need to solve for distribution."

• Silvergate plans to use a different channel of distribution by building off of Meta's Diem assets, which the crypto bank bought earlier in the year.
• "Think about a company like Uber, Shopify or Spotify. Any one of those platforms, they would be our customers," Lane says hypothetically. "We would issue the tokenized dollar to them and they would distribute them to those users."

Meanwhile, stablecoin legislation is geared toward existing players, leaving open the possibility of specific challenges for crypto banks, Lane said.

• "There’s a big focus on how [stablecoin] issuers manage their reserves, and it’s not a necessary focus for a bank," Lane says, referencing proposed legislation. It could essentially require banks to do the same, separating out reserves into another account.

State of play: A crypto bank does what any other bank does — taking in deposits and lending those deposits out in loans — only it handles digital assets, too.

• For now, Silvergate continues to bank bitcoin whales like MicroStrategy, also operating as a transactional platform for stablecoin issuers such as Pax and Circle.

• "The unique difference between Silvergate and most banks is our customers need access to their funds 24/7," Lane says.
• "We provide that access via the SEN" — the Silvergate Exchange Network, the bank's payments platform.

Be smart: "We also don’t lend out deposits the way a traditional bank would, we have a much lower loan balance," Lane says, drawing a line between Silvergate and say, JPMorgan — but also certain bankrupt crypto lenders.

As for the crypto winter, Lane says he had expected lower trading volume. But he also points out deposits saw a "modest drop" compared to figures in the last bear cycle.

• Deposits were down 12.5% between 2018's first and second quarters, according to Lane.

What others are saying: "Shares of [Silvergate] fell sharply during today’s trading session after the company's [third-quarter] report showed lower-than-expected usage during the quarter of its Silvergate Exchange Network (SEN), " Mark Palmer, a stock analyst at BTIG, said in report last week.

• Of note: Palmer reiterated his positive rating on the stock.

What's next: "[Silvergate is] working behind the scenes — working on the operational muscle and the regulatory compliance muscle, so we can launch something," Lane says.

The bottom line: Maybe a dark horse will win the stablecoin race. Meanwhile, the majors are competing fiercely for greater market share.