On The Brink with Castle Island - Alan Lane (Silvergate) on banking the cryptoasset industry (EP.146)

Episode Date: November 9, 2020

Alan Lane, the CEO of Silvergate Financial joins the show. In this episode we discuss: How Silvergate came to bank blockchain companies. The challenges and opportunities in providing services in this fast growing market. Silvergate Exchange Network – how this product is driving growth and solving customer pain points. Alan's perspectives on stablecoins and how Silvergate plans to play in this area. Views on the long-term opportunities for digital asset custody and lending.   To learn more about Silvergate visit their website.   Sponsor notes: Withum is a forward-thinking, technology-driven advisory and accounting firm committed to helping our clients be more profitable, efficient and productive in today's complex business environment. Our Digital Currency group is proud to partner with members of the cryptocurrency community. Get to know us at withum.com/crypto.

This episode is brought to you by Witham. Witham is a nationally ranked public accounting firm providing advisory, tax, and audit services to businesses on a local and global scale. More on Witham and their fast-growing crypto asset practice later in the episode. Today on the podcast, I sat down with Alan Lane, the CEO of Silvergate Bank. Silvergate is a publicly traded bank that has a strong and fast-growing business in the digital asset space. As listeners of this podcast will know, banking has been a big pain point for startups in the blockchain in crypto-asset space. for quite a while. Many of these businesses are regulated as money service businesses, MSBs, which is another category that banks have historically been pretty shy to deal with over the past

decade. Luckily, there are forward-thinking management teams like the one at Silvergate, and these teams have stepped in to bank these companies. And it's about a lot more than just checking accounts. Silvergate also has a strong and fast-growing business in the post-trade settlement space with Silvergate Exchange Network, as well as a new business in the lending space that is just getting started. I think you'll enjoy hearing the story of how Silvergate got their start in the space and what they have planned in the months to come. So without further ado, here's my conversation with Alan Lane. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Ellen, so thanks so much for joining the podcast today. I'm really excited to have you on. Yeah, thanks, man. Thanks for the invitation. I'm really looking forward to this. And there's so much to get into. I've been really wanting to do an episode on banking and some

of the critical infrastructure that's being built out right now. Obviously, Silvergate is at the bleeding edge of that. So a lot to get into. But maybe before we do, could we just start out for the listeners with just having you give a quick introduction on yourself and the path that led you to become the CEO of Silvergate? So I started in banking as a teller while I was in college. And that was almost 40 years ago now. And so over the last 40 years, I've done just about every job you can do in a bank. I came up on the finance and accounting side. But importantly, in the 90s, I spent several years in private industry as CFO and CEO of both retail and manufacturing companies. And that was great experience because it really allowed me to see from a business

owner's perspective, operating a business, what does a business need from their bank? And so when I got back into banking in the late 90s, I was focused on business banking. And that's what I've been doing for the last 20 years and was attracted to Silvergate back in 2008 right at the height of the financial crisis. The previous bank that I had been working with had sold and I had taken a little time off and that turned out to be really good timing because a lot of banks started failing around then with that last financial crisis and I was looking for a bank to rejoin and kind of help come out of the financial crisis and I was attracted to Silvergate because it was a very clean, a profitable but small financial institution. There were four.

40 employees. It's actually when I joined was the smallest company I'd ever worked for. 40 employees, a little under 300 million in assets, no real deposit franchise to speak of, but a very creative board of directors, very creative chairman who was not afraid to look at opportunity where others kind of feared to look, that while his experience was primarily on the asset side, we took that same approach on the liability side, which kind of takes us right into the crypto initiative several years after I joined, which is just looking where other people see risk, oftentimes if you can figure out how to mitigate that risk, then there's a potential opportunity. And so I just feel really blessed to have found Silvergate back when I did.

And we're quite a bit bigger today than we were back when I joined. And certainly, you know, are playing a huge and vital role in some of the infrastructure companies that are being launched here in the digital assets crypto space. What was the story around how you started to see crypto assets as an opportunity for the bank? And what was the process of getting the bank mobilized around this initiative? I'll kind of tie that with what I was just saying. Because Silvergate was clean and well capitalized and profitable, we could land back in the days of the financial crisis when other banks couldn't. So we grew from a small size fairly rapidly.

and we were struggling to keep up with the funding side. And I'll get myself in trouble with the Bitcoin folks here, but we're a fractional reserve bank, right? And so we need deposits to turn around and lend them. And because Silvergate didn't really have a deposit franchise to speak of, we were looking for sources of deposits, deposit niches. So that was kind of my day job. And then I'm a naturally inquisitive person.

I've always been a fan of technology. And so I try things. And I was reading about Bitcoin back in 2013. And I was read, you know, just at a popular level like Wired magazine and Fast Company and that kind of stuff. And, you know, reading how you could be your own bank. And so I decided, well, I should buy some Bitcoin and figure out how that works. And so I did. And I thought, wow, that is really cool.

So as I was learning more about Bitcoin, and this is before Ethereum and everything else came on the scene here, as I was learning more about it, I discovered that a lot of companies that were being formed were being derrised by their banks. So that's when the light bulb went off. And I thought this might be an opportunity because there were very reputable companies backed by reputable VC that were getting kicked out of banks. And I figured, you know, they're not doing anything illegal or immoral. They actually want to follow the laws and the regulations. But yet they're just being painted with this really wide brush of, oh my goodness, they're a money service business. We can't do business with them. So that was really it. But I will say, I did see early on the fact that this could be

kind of world changing. It's just been really exciting to be a part of it. Yeah, it's like nothing I've ever seen. And I'd be curious your perspective from running a bank if you've ever seen an industry like this. Because if you think back on it, those early days, and I guess to some degree even now, you have this intersection of a lot of companies are MSBs and they're doing things in the crypto space. And that's sort of a Venn diagram that doesn't look very attractive to a lot of banks. But at the same time, you have this growing industry. And so it was always kind of strange to me that there was a lack of interest from many banks and servicing these type of customers. So how were you thinking about that just from a kind of a market entry strategy

and mitigating some of that risk when you're getting this off the ground? At the beginning, because many of these companies were considered money transmitters and needed to be licensed, et cetera, and registered with FinCEN. It was absolutely imperative that we develop a strong compliance program. And early on, we invited the regulators in. This was in the summer of 2014. By that time, we probably had maybe a half a dozen accounts. I'll mention here that our very first customer was second market, which became Genesis and became part of the digital currency. group, family of companies. I had actually met second market in a prior life, if you will, when they were looking at potentially making a market for illiquid community bank stocks. And so,

you know, you talk about how things intersect. We looked at them as this is a broker dealer, and they're trying to help their customers buy Bitcoin. And so we should be able to figure out how to help them. And that theme, and I'll pause there for a second, because it really is all about how do we help our customers? And this goes back to the days when I was in private industry and what does a company need from a bank? In a perfect world, our customers don't really have to think about us. They are trying to build their own businesses and they just want their banking to work. And so how do we solve problems for them and started out with just being willing to talk to them? But we knew that that wasn't going to last forever, that eventually if this took off, there would be a lot of other banks coming in.

And so how could we really be helpful and relevant? We've always looked at ourselves as an on-ramp and an off-ramp from the U.S. dollar into and out of Bitcoin and other cryptocurrencies. How do we do that in a way that really solidifies the relationship? And that's kind of where the send came in, but I'm probably getting ahead of the story here a little bit. As you were talking, I was thinking back to some of the conversations I've had with VC peers that are in other industries.

And I talk about some of these core banking needs that a lot of the startups have had in this ecosystem. And it wasn't long ago that one of my first questions to a lot of companies that we looked at was, do you have a bank account? It's just a very difficult problem. So maybe, I guess, using that as a backdrop, could you talk a little bit about just the product progression at Silvergate over the years, kind of where it started and now what you're offering from a product perspective? Yeah, that's a really important question because early on, as I mentioned, these companies were just happy to have a bank to talk to. And primarily, they just needed a bank, many of them just needed a bank to open a general operating account so

they could pay their rent and their payroll. But then early on, you know, we had met some of the exchanges. They obviously had a little bit more sophisticated needs because they wanted to be able to hold deposits on behalf of their customers. And so that then truly is a money service business. And so it started with, well, let's open a general operating account. Let's get to know what is the business like. What are you trying to accomplish? And then basic checking sounds really boring. but that was where we started. Today, our primary, what we're known for, if you will, is the SEN, the Silvergate Exchange network.

That is truly a two-sided network. If you study networks like Facebook and Uber and et cetera, we believe that we've got this classic two-sided network where we've got exchanges, OTC desks, you know, other forms of liquidity providers on one side of the network, and then on the other side, we have institutional investors. We've got almost 600 institutional investors, and that runs the gamut from family offices, hedge funds, venture capital firms, people that are investing in digital assets as a new asset class. And we connect those two groups of customers over the Silvergate Exchange Network. But importantly, we've built a lot of tech along the way, and this is not blockchain tech. This is kind of basic

banking tech in a sense. That's not true. It's not basic. Because not, not many banks have transactional APIs. There are a lot of banks these days that have APIs that you know that the API can ping a bank for a balance in an account or for transaction history, etc. But we took it to the next level back in 2016 by saying, you know what, why can't we allow our customers to actually initiate a transaction with an API? Now, if we hadn't done some work prior to that in terms of looking for a core banking system that was actually open to APIs, then we wouldn't have been in a position to do that. So to your question, now the API is really what kind of drives everything. Early on, as we had this idea, we talked with Coinbase. And it was actually

Adam White. And we asked Adam, we said, hey, if we built this thing called the San so that you could move money 24 hours a day, seven days a week to other clients of Silvergate, would that be valuable to you? And he said, absolutely. But if you're going to do it, you need to build an API. Because we can't have somebody sitting at a computer looking at online banking all day saying, oh, we just got $10,000 from Matt. Let's put it into his account so he can buy Bitcoin. So we built the API. And that's really been the game changer course.

I want to double click a little bit on some of this functionality because I think people that are maybe not in the crypto industry won't appreciate just the lack of infrastructure that was around before SEN existed. And you're talking about an industry where trading really occurred at an OTC level, largely for big block trades. And you're talking about doing Skype transactions. You're talking about having bilateral agreements on who wires first and who sends crypto first. You're having all sorts of reconciliation issues. You're having trades that are happening right before Fedwire closes that aren't settling for another day. Maybe just talk a little bit about what that landscape looks like now

with Sen, who's using it, what they're using it for, and kind of what you see that roadmap looking like. Yeah, and just to emphasize the point that you were just making, when we first started banking second market in January of 2014, the way we got comfortable with knowing where the funds were going is we actually asked them, okay, when you send us a wire, you send us a $50,000 wire for someone that's buying or selling Bitcoin, we also want to see the blockchain address for the other side of the transaction. And believe it or not, we would type that address into a block explorer. And what we wanted to see was we wanted to see a transaction on the blockchain that represented $50,000 worth of value to match the $50,000 wire. They were so blown

away that we were asking that question because not many banks were willing to even bank them, let alone had an understanding of a block explorer or a blockchain. Obviously, this was before all the blockchain tools have come out. The stuff like now with, coin metrics, et cetera. I mean, it's just awesome how far things have come. So to your question, who's using us now? So we've been public about some of the names. So Coinbase, Genesis, Gemini, BitStamp, Circle, Paxos, they're all customers of Silvergate. So that's the kind of a landscape of exchanges. I think all of them, yeah, absolutely, all of them have coded to the API. And what that involves,

is, I mean, this API, a banking API is fairly simple. There's only a certain number of things that you can do, but their technology stacks at the exchange are fairly sophisticated. They're running order books. They might have an omnibus account. They're trying to keep track of individual deposit balances for their customers. And so the time that they take to integrate our API into their technology stack is really the game changer, because once that happens, then whether it's a send transaction or not, and I'll talk about the other side of send in a minute, but as wire transfers come in to their bank account, they can be attributed immediately with the API. Same thing with ACH. And so put aside for just a second, the power of send and just think about during normal banking hours when transactions are coming in and going out,

they can happen instantly versus, as you were talking about back in the day, someone would would send a wire and then it would sit at the bank's wire desk and then they would eventually call and say to someone over at Second Market, which is now Genesis, they would say, hey, we just got a $10,000 wire from this guy, Matt Walsh, and then they would then eventually call you and say, okay, Matt, now you can do your trade. Now that all happens instantly. And so on the other side of the SEN, on the other side of the exchanges is all the institutional investors. And they actually have two options. They can either code to the API if they've got to. got a sophisticated technology team and they have coders, they can code to the API and make it part of

their stack, or they can just simply use online banking. And when they log into their online banking, they will see a menu of whoever they've been connected to. And so they can log in and they can literally have two screens on their desk open at the same time. Let's say they got Coinbase and they've got their Silvergate portal. And so they transfer money on Silvergate and they transfer it over to Coinbase. and then they hit refresh on the Coinbase screen. And depending on what Coinbase is or one of the other exchanges, depending on what their protocols are, it's literally that instantaneous that they can then see that they have the money

in their account at Coinbase and then they can trade. The important thing there is that can actually happen 24 hours a day, seven days a week, 365 days a year. So as long as you've got money in your Sovergate account and you're connected to a liquidity provider, you can transact around the clock around the world. And that was the real game changer. And we actually launched that in 2017. And that's definitely been a game changer from what we've heard with market participants around some of the capital efficiency and also just the saving on some of the

reconciliation expenses at some of these larger venues. When this was a purely phone broker model, it was kind of ugly there. If you're a regular listener of this show, you know that we take accounting and auditing pretty seriously. And that might seem a little bit strange. in an industry that prides itself on the removal of intermediaries, but we think when it comes to digital assets, trust relationships with counterparties like custodians and brokerages is critically important. Witham is a top 25 ranked accounting tax and advisory firm. They have a digital currency and blockchain group that's working with some of the highest profile companies in the industry on things like tax advisory, financial statements, token sales, stable coin audits, and much,

much more. To contact their team, go over to witham.com slash crypto. That's WI.T. H-U-M-com slash crypto and get in touch with someone on their team. Now back to the episode. Maybe talking a little bit more about some of these infrastructure categories that start to get very compelling for banks and particularly for Silvergate. How are you seeing lending right now? I noticed that you spoke a bit about that during your last earnings call, and that's a market that's really exploded over the past 12 months.

So how are you thinking about the lending market? For almost as long as we've been doing this, we've thought, or I at least have thought about lending against Bitcoin because of the nature of the Bitcoin market, the fact that it's a 24-7 market and that it's a bare instrument. He who holds the keys, right? Not your keys, not your Bitcoin. And so, but in order to actually affect that, first step is we have to have confidence that we actually do have those keys, right? So that's the custody piece. And then beyond that, then it's okay, if I have confidence that I have control of the Bitcoin collateral, then I'm comfortable lending against it. But Bitcoin is fairly volatile. I know there's been a lot

of talk lately, especially by one of the up-and-comers in the space that, well, it's not as volatile as other assets currently. Nevertheless, it's volatile. And it trades 24-7, right? And so this is where the power of the send comes in because we can actually help our customers borrow against their Bitcoin and then make margin calls 24 hours a day, seven days a week. It can be done programmatically via APIs. And so we've been working on this. We announced the pilot back in January of this year with BitStamp. And then we added a second partner with Anchorage in the month of May. Both of them we had been working on for some period of time before that. It takes a while until you're ready to announce that you're launching a pilot. And so this has been an initiative that for us has been

in the works for since the beginning of 2019. And so I actually think this will end up being some of the best lending we've ever done because of the nature of the collateral in the market. And how do you structure these loans? Are they typically term loans predefined with just bilateral relationships with whoever's entering into that transaction? How exactly do they work? Yeah. So our take on it is a little different. And it might take our customers a while to get used to the real functionality that we're providing because we really view this as a margin loan as like a line of credit that they can access 24-7 and pay down 24-7. So it's not a term loan in the way traditional banks think of a term loan, which would be, okay, well, I'm making you a loan,

I'm giving you all the proceeds right now, and you've got to pay it back at the end of the term, or you're going to make payments over the term. This truly is available to them 24-7. So the only term will be the annual renewal, if you will. And then as corporate treasuries come into the market and start looking at allocating some of their corporate treasury to Bitcoin, we've already started having some conversations with some of those folks about, well, hey, if you ever want to borrow against that Bitcoin, if you want to come back into the Fiat world to pay your payroll or something, or, you know, then we're happy to provide you a line of credit against your Bitcoin for something like that. That would be a different use case as opposed to a trader who might be looking to

take advantage of some arbitrage opportunity or some dislocation in the market that might be happening in some other jurisdiction on a Saturday night, for instance. That credit facility angle is certainly, from a customer experience perspective, you could see that being very attractive to, I guess, a range of customers. As you're saying that, the thing that came to mind was people that are looking to buy a house, even at an individual level, that would be a really attractive product. Do you imagine that we'll start to see market entry there with retail focused lending? I think it's interesting. there's some very good companies out there that are already providing leverage. Obviously,

Genesis is one, blockifies another, but to your point, to do some kind of a term loan like that, I'm not sure that's a use case that they're currently set up for. It's definitely a use case that a bank could consider. And this is one of the reasons I'm just so, so grateful that we got lucky back in 2013 and discovered this and have done all of the legwork. work that we've done because notwithstanding the fact that there are certainly other banks coming in, it just takes a while, as you know. I mean, there's so much to learn about this and there's so many potential boogeymen out there, you know, people are afraid of that you just need to get your hands around in. And so I really feel blessed that we're in the position we're in.

You're being very modest in saying that you got lucky. I'd say, I would argue, and I'd be curious your perspective on this is that if you look at the most successful companies in this industry, the commonality between all of them is that they have CEOs that are really bought into this industry and that have spent the time to examine it. So I put Abby Johnson in that category, Jack Dorsey, I'd put you in that category. So I'm curious kind of how you've thought about just building a culture of innovation around this as someone that's obviously bought in at the senior level. How do you get that buy in from your board and from your senior management team? I appreciate those comments. When you're passionate about something, it just kind of bubbles out of you. And it's

contagious. It was funny. I was listening to some of the podcast that Michael Saylor has been on, and he described the journey that he took his board on in a very compressed period of time, right? I mean, I've had, and I've really thought about this. It's been both a blessing, as well as potentially a little bit of an anchor around my ankles in terms of trying to drag people along slowly because we're a bank and we're in a regulated financial industry and the market needs to mature. I was actually reflecting on how different would it have been if I was in Michael Saylor's shoes and I was trying to convince my board within a span of like three months that we needed to pivot. There's no way that that could have ever happened inside a regulated financial institution.

But as I said at the beginning of this, the Silvergate board has always been creative, open and willing to explore new things. And we are also very blessed to have great relationships with our regulators. We're a California state chartered bank. Our deposits are insured by the FDIC. We're a member of the Federal Reserve. And one of the things that's really important to us is that we have good relationships with all of them and that we don't surprise them. The last thing they want to do is get a call from somebody about something going on at Silvergate. So we have regular dialogue. We let them know way ahead of time. So I was talking earlier about the send leverage journey and the fact that we started that in 2019. We had conversations with our regulators in probably June or July of 2019.

And to their credit, because of our ongoing dialogue, they said to us, well, we were wondering when you were going to start landing against Bitcoin. It wasn't an, oh my God, what are you doing? It was, yeah, this is a natural progression that we've anticipated because of everything else that you've ever said to us. Now, to your question about culture, when I got to Silvergate, it was, as I mentioned, it was small, but it was one of the best companies that I had ever joined just in terms of, I immediately felt welcome, immediately felt part of the team. I had everything I needed to do to do my job. And I've reflected on the fact that, well, I was coming in as the CEO. So maybe my experience was different from other employees. But having said that, as we now have over 200 employees, I constantly hear

from our employees that Silver Grades is a great company. I joke with people and it's not much of a joke. I say, my biggest contribution is that I didn't mess it up. The great culture already when I got here, and 12 years later, it's still a great culture. We've got a great team. We don't have a whole bunch of crypto experts, but that group is growing. We had a call last week. Before the pandemic, we used to have a thing called Crypto Night. Well, it was actually called Monday Night Crypto. And we had about eight folks internally that would get together. And on this last Zoom call that we had, there were 16 of us. And that's just a group of like the leaders. And then there's a bunch more behind them that are really passionate about this. We have internal arguments, especially back like with Bitcoin Cash.

There were the big blockers and the small blockers inside a Silvergate. And those that are really into defy and they're trying different things. I have to admit, I'm older. I'm a Bitcoin guy. Well, that'll be popular with our audience for sure. You're talking about staying the course. I think when history is finally written on this industry, so much of it will be about the companies that just stayed the course and knew that there was something enduring here, even if they didn't know specifically what it was.

I mean, I remember in probably the end of 2015, early 2016 at Fidelity, I was really wondering if we were going to keep on trucking and keep on persisting here. This was before any business. was launched, any fund was launched. And I was saying, I don't know, like, they're probably just going to shut this whole R&D experiment down. I mean, like, how are we going to make money doing this? But there was extraordinary buy-in at the top there, which obviously you've driven at Silvergate. And I think it puts you in a position to capitalize on things when they pop on the scene. And I think the latest thing that's popped on the scene, to me at least, is stable coins,

or as we like to call them crypto dollars. And this is just a phenomenon that I don't think anyone could have really predicted how fast this has grown. So I'm curious what you, your posture is towards that opportunity and how you see that market evolving? I think you're absolutely right. I think the crypto dollar phenomenon is here to stay. I mean, obviously, I assume talking specifically about crypto dollars as they exist today. Obviously, there's a whole CBDC thing that's really popular. But staying on the stable coin or crypto dollar theme for a second, we are the bank, the on ramp and the off ramp, the transactional bank for every U.S. regulated C.

stable coin issuer. So the USDC from Circle and Coinbase, the Pax doll or the Gemini dollar, true USD. And why is that? Because of our API I was talking about earlier. The ability for those stable coin issuers to program their technology stack with our API so that they can automatically 24-7 mint and burn tokens. And so it can happen programmatically. Keep using the example. But if you decide that you want to buy $10,000 worth of USDA, you can do that on nights and weekends if you're a customer of Silvergate and you actually send a, well, and actually I don't want to just say that because with the API, technically they can do that with a wire or an ACH, although obviously not on a Saturday. And so that's where it becomes beneficial to be a customer of Silvergate and then also a client

of one of those stable coin issuers. We much prefer to be the transactional bank as opposed to the reserve. bank, if you will, it kind of plays to our strengths while also acknowledging the size limitation, right? I mean, if this gets huge, there's no way that Silvergate can be the reserve bank for hundreds of billions of dollars of crypto dollars that might be out in the ecosystem. But we can absolutely, you know, that beautiful thing about technology is it's very scalable. So we can absolutely be the mentor and burner of those tokens and then let some other bank hold on to all of those dollars.

Well, to the extent that we start to see what we think we're going to start to see here, which is applications being built with this functionality, then that becomes a really attractive place to be in terms of being the transactional mint and burner there. But you brought up an interesting point about the kind of the reserve bank as well. And one thing that I'd be curious to get your point of view on is this recent OCC guidance letter, which indicates that federally chartered banks can now custody Bitcoin. What impact do you think this will have on the industry and sort of how are you thinking about that? from your seat? I think it actually provides banks a way to participate in the space without really having to candidly to do much other than certainly they're going to have to get their boards and their management and their risk teams all comfortable with it. But we've recently seen the news that JP Morgan is considering offering custody, right? And how are they going to do that? Well,

they're likely going to partner with one of the existing custodians. And this is where you really start to see the benefit, as you're pointing out earlier, of all the folks who have been slogging it out, they've been patient for all these years, building these great custodian platforms, these custody platforms that someday will be worth something. And they're going to be worth something to the bigger banks that want to come in. And they're already providing custody for their customers for other assets. And they can just sign an agreement with one of the existing custodians as a service provider and start offering that as well. So I think it's definitely going to start happening. One of the things I'm curious to see what happens here is just what that market structure starts to

look like. I mean, if you look at the traditional market structure, you have maybe five or six global custodians and then a lot of services built on top of that, do you think it'll mirror the same structure in crypto assets where you have some of the larger ones and then brokerage platforms built on top of that? Or do you think that the banks will really want to kind of own that full life cycle of owning custody, also owning brokerage? So there's what might happen and what we all hope would happen. And as a bitcoiner, I kind of hope it doesn't happen that way, right? I mean, yeah, I'm the evil banker, you know, but the fact of the matter is, even with

send leverage, I would prefer if there was a way that we could do it in such a way that, yeah, we'll be the custodian. And we absolutely need to control those keys when there's money let out. But could we do some kind of a multi-sig to where, and I know there's other platforms out there that are playing with this concept, but somebody can hold their keys, they can hold their Bitcoin, but maybe we have a key as well. And maybe it's a backup key to start with, right? Like it's a two of three or three or five, and we've got one of them.

But then at the point they want to borrow, they actually then give us control, but they still have a key. That way they can still kind of monitor that we're not re-hypothicating. I think there are ways that we can kind of continue to maintain the ethos of what we all hope Bitcoin can be. Having said that, back to your question, I'm not sure that many of the big banks care about that. And I think they're going to look to just replicate exactly. And that's what we've been seeing. And I think that's going to happen more and more.

We may be the outlier that's trying to do it in a more creative way. We don't have anything to announce in that regard yet. But I think about those kinds of things because I have it probably a deal. different view on Bitcoin than what other bankers like. I couldn't agree with you more. I mean, if you look at what this could end up looking like, if we start to centralize here at the custodian level, I mean, you don't want to live in a world where 30% of the bitcoins are controlled by BNY Mellon and 25% are controlled by city.

But I'd love to live in a world where Silvergate holds a key, Fidelity holds a key, and I hold a key or some sort of a scheme that could be safe like that. And then you kind of, you're talking about these banks and custody providers actually looking a lot more like technology firms than traditional custodian firms. I guess the question is, does the definition of a good control location contemplate the existence of an asset that can be split like that? And what would actually have to have, like, how could we make that happen? I actually think that you could. And in the example that you just used, it would really end up, it comes back to counterparty risk. In the example you used, we'd have to be comfortable with

fidelity and fidelity would have to be comfortable with us. Now, there's a little bit of a disparity in size there, right? But suffice it to say that in that kind of a situation, it's no different than any of the other kind of vendor risk management that's out there right now. I mean, even today, we don't custody the Bitcoin ourselves for SEND leverage, right? We have partners. We talked about them, Bit Stamp and Anchorage currently. So when we were looking for partners for SEND leverage, very first priority was somebody that can custody and make sure the Bitcoin is safe. I'll also tell you that Bit Stamp has a partnership with BitGo, right? You know, I mean, so there are layers here that are important. So we have to get comfortable with the custody number one and then with the functionality

around monitoring the price and monitoring the, you know, the loan outstanding and the order book, the depths of the order book and all of that kind of stuff. And so there are already vendor relationships and vendor agreements and people are getting comfortable with sharing the risk, if you will. And so it really just becomes a matter of, can we replicate that in the form that you were just discussing. Yeah. And I guess can you get the regulator to get comfortable at that at the end of the day, which would be huge, I think, for the industry. Kind of staying on that regulatory front, I guess over the past couple of years, we've started to see FADF start to get a lot more vocal with rhetoric around travel rule compliance. So where do you think we are as an industry

in satisfying some of these travel rule considerations and what do you see happening in the months to come, I guess in the United States and elsewhere. The travel rule issue has been a little bit of a definitely been a thorn, a burr in the saddle, whatever metaphor you want to use, even going back to the early days when we got into Bitcoin and we were talking with some of the early payment use cases, right, folks that wanted to use the Bitcoin blockchain or some form of blockchain to usurp Visa MasterCard, for instance, right? And one of the questions was, well, how are you going to handle a travel rule? And we've just seen recently, a bunch of the exchanges in the U.S. kind of getting together and saying, okay, this is how we

propose to handle it. So I think it's going to be an ongoing thing. I think it's one area that the crypto dollar, the crypto dollarization with bigger projects such as Libra, you know, there are a lot of things that folks need to get their hands around in order to have regulatoryly compliant offerings for some of these use cases. But to a certain extent, the genie's out of the bottle. and it's just a matter of satisfying the requirements. And there are a bunch of smart people in this industry. And then we've got folks like CoinCenter. There are plenty of folks that are working on figuring this out.

And it's great that we have folks in Congress, higher up in some of the regulatory agencies who are pro-Bitcoin, pro-crypto, that I think can help pave the way. Yeah, I agree. It's going to be an interesting 12 to 24 months on that timeline. So what's on the horizon for Silvergate? I mean, you're growing like crazy. You had a really good earnings call this week.

What do the next 12 to 24 months look like? for you? To a certain extent, it's more of the same. I mean, we are very early with send leverage. And so I certainly think over the next 12 to 24 months, send leverage is the opportunity for Silvergate from a near-term shareholder value perspective and value to the ecosystem. As great as the existing platforms are, I think there's just a lot of demand for borrowing against Bitcoin. And so I think we're coming out with this at just the right time. We've already been, been working on enabling a correspondent banking model. We started this because as many of our customers are outside of the U.S. and they have foreign currency needs, and as we tried to develop

foreign currency relationships with larger banks, well, guess what? The same banks that don't want to bank Bitcoin also don't want to do foreign currency exchange for Bitcoin and crypto-related companies. And so what we've done is we've actually started developing direct relationships with crypto-friendly banks in other countries. So going out and finding the silver gates of Europe in Asia, notwithstanding the fact that DBS just came out really big yesterday, so there's movement outside of the U.S. for sure. But on the correspondent banking front, as we're working with some of these foreign banks so that we can have an account with them, they can have an account with us, we can potentially open up the sand to them. That gets really interesting to think about

potentially having foreign currencies moving across the sand, lots of potential possibilities there. But then we have the Wyoming speedy banks, which certainly hope to eventually have direct access to the Fed payment system. But to the extent they want to get up and running right now, they're going to be looking for correspondent banking relationships. And the same banks that don't want to bank Bitcoin companies don't want to bank a Speedy Bank in Wyoming. So the fact that we stood up a correspondent banking offering a year ago for foreign banks. There's no reason why we can't offer that service here in the U.S. as well. So what am I missing? Well, custody, duh. We've been talking about custody for years. The primary use case for us was and has been so that we can have control of the private keys

so we can lend against them, especially when there were so many custodians coming out, and it's kind of a how do you make money at custody? But as J.P. Morgans of the world, and others start to come into the custody market. It's looking like custody might become table stakes for a bank. I mean, how could Silvergate be one of the leaders in this industry and not provide a basic custody service? So we'll likely be doing something like that. We've been talking about it for a while. We don't have anything to announce right now, but that's on the roadmap. And then the crypto dollar. So there's plenty for us to do, Matt. And it's just super exciting to be in all these conversations and being able to help in just about any way that a Bitcoin or crypto company wants help from a bank,

I feel like we're in a great spot to be able to help them. It sounds like it. It must be really interesting, just from a competitive perspective too, because I can imagine a few years ago when you started in this space, you probably weren't having a lot of other bank CEOs call you up and try to figure out how you were doing things. They weren't really that interested probably in the industry. But now things are growing so quickly. And you have to think that if you're a large bank and you're looking to get involved in

this, just understanding the market structure is kind of a daunting task. So are you having a lot of of those interactions with your peers at other banks that are trying to figure this out? And I guess what's the nature of those conversations? Unfortunately not. Now, I don't know if that's just because there's still a lack of interest. I mean, one of the things, we definitely are in an echo chamber. I mean, those of us that are in this industry, we eat, sleep, you know, and breathe it. And then there's the rest of the world. But more than that, more on a daily, weekly, monthly basis. The rest of the world is waking up to what this is. But candidly, no, we're not having many of those conversations. But at least it's no longer a kind of

taboo topic. I mean, I distinctly remember, I talked about this and it was actually published in some banking periodical back in 2013 or 14. I was at a bank CEO roundtable. It was a regulatory roundtable up in Sacramento in the fourth quarter of 2013. And there was talk about Bitcoin and one of the bank CEO says, well, you know, I think they should just outlaw it. And, and I spoke up and I said, well, I hope they don't do that because I just bought some Bitcoin. And then, you know, everybody looked at me and I made sure I walked up and talked to the commissioner of the banking department right after that and let her know exactly what I was doing. So it's good for you. You're fighting the good fight. Well, this has been a lot of fun now and I'm really excited about what

you guys are building. Where can we send people to learn more about Silvergate if they want to get involved as a customer, if they want to take a look at some of the open wrecks that you have on the employee side. Yeah, I appreciate that. So silvergate.com. It's the best place. If you're looking for an account, you know, we actually can take account applications right on the website and got a portal there as well so that as if we get to that point, people can actually upload all the documents that are needed in order to open an account. We're always looking for talent. In fact, we just had a meeting yesterday on kind of the technology roadmap for next year and, you know, came out of that meeting thinking, okay, we're going to have to hire some more developers.

There was a jobs portion on the website too, so silvergate.com. That's great. Well, we'll have to have you on about a year to catch up. Thanks so much for doing this, Alan. Absolutely. I really appreciate it. Look forward to staying in touch, man. Take care.

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