#1059 Alan Lane On Traditional Banks Using Bitcoin As Collateral

Alan Lane is the CEO of Silvergate Bank. In this conversation, we discuss their Q2 earnings, the transition to incorporate digital assets, using Bitcoin as collateral, and why Alan believes that Bitcoin is the best collateral that he has experienced in 40 years in the industry. ======================= If you’re trying to grow and preserve your crypto-wealth, optimizing your taxes is just as lucrative as trying to find the next hidden gem. Alto IRA can help you invest in crypto in tax-advantaged ways to help you preserve your hard earned money. Alto CryptoIRA lets you invest in more than 200 different coins and tokens with all the same tax advantages of an IRA. They make it easy to fund your Alternative IRA or CryptoIRA via your 401(k) or IRA rollover or by contributing directly from your bank account. There are no setup or account fees, and it’s all you need to do to invest in crypto tax free. Let me repeat that again: You can invest in crypto tax free. So, ready to take your investments to the next level? Diversify like the pros and trade without tax headaches. Open an Alto CryptoIRA to invest in crypto tax-free. Just go to https://altoira.com/pomp ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp ======================= Valour (formerly DeFi Technologies) represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U. S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at valour.com ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Alan Lane is the CEO of Silvergate Bank. In this conversation, we talk about their Q2 earnings, their overall market outlook, their brand new SCN leverage platform, and also how Silvergate is looking at digital assets moving forward in the future. I really enjoyed this conversation with Alan, and I hope you guys enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. This episode is brought to you by Alto IRA. If you're trying to grow and preserve your crypto wealth, optimizing your taxes is just as lucrative as trying to find the next hidden gem. Alto IRA can help you invest in crypto in tax advantaged ways to help you preserve

• 0:45Anthony Pompliano?

  your hard earned money. Alto Crypto IRA lets you invest in more than 200 different coins and tokens with all the same tax advantages of an IRA. They make it easy to fund your alternative IRA or crypto IRA via your 401k, or IRA rollover, or by contributing directly from your bank account. There are no setup or account fees, and it's all you need to do is to invest in crypto tax-free. Let me repeat that again, you can invest in crypto tax-free. So, are you ready to take your investments to the next level? Diversify like the pros and trade without tax headaches. Open an Alto Crypto IRA to invest in crypto tax-free. Just go to altoira.com/pomp. That's A-L-T-O-I-R-A dot com slash pomp. Start investing in crypto tax-free today.

• 1:29Anthony Pompliano?

  This episode is brought to you by LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of crypto liquidity on the planet, underscored by 100% uptime track record through volatility spikes. They leverage LMAX Group's liquidity relationships and ultra-low latency technology. LMAX Digital is the market-leading solution for institutional crypto trading and custodial services. LMAX Digital features a central limit order book that streams various cryptocurrencies, and it's all paired with US Dollar, Euro, and Yen. They also allow you, over the internet, to execute your crypto trading strategy with precision. LMAX Digital, you may have never heard of them, it's because they only serve institutions, but they're secure, they're liquid, and they're trusted. You can learn more at lmaxdigital.com/pomp.

• 2:13Anthony Pompliano?

  Again, check it out at lmaxdigital.com/pomp. This episode is brought to you by Valor. Valor represents what's next in the digital economy. They provide simplified trusted access to crypto, decentralized finance and Web 3 investment opportunities. Institutions and investors can gain diversified, secure, compliant and easily tradable access to a diversified set of industry-leading equity products and protocols through a single stock purchase on a regulated exchange. They're currently listed on the OTC at DEFTF and on the Canadian NEO exchange at DEFI. For more information or to subscribe to receive company updates and financial information, you can visit their website at valour.com. That's V A L O U R dot com.

• 2:56Anthony Pompliano?

  valour.com. Go check them out today.

• 2:59Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:23Anthony Pompliano?

  All right, guys. Bang, bang. I've got Alan here with me. Alan, you guys recently announced your Q2 earnings and in it, there's lots and lots of growth. There's lots of kind of good things for the business. But what's so fascinating is a couple of years ago, Silvergate was a relatively small bank, had not yet entered into Bitcoin, crypto, kind of any digital assets. Why did you all make the jump into what was a small but fast-growing industry that probably most of your colleagues thought you were crazy for doing?

• 3:51Speaker 02

  Yeah, it's a great question, Pomp. And by the way, it's great to see you again. Congrats on all your success. The last time we did this, we were in a little office in New York City. And now you've gone mainstream. Congratulations. It's pretty awesome.

• 4:08Anthony Pompliano?

  I appreciate it very much. Sometimes you miss the office, but other times you realize that this is just as much fun. Now we just got to do it again in person next time.

• 4:16Speaker 02

  Absolutely. Yeah, I'd love to do that. So, yeah, so, so to, to take a step back and talk a little bit about Silvergate, to answer your question, you know, back when we started looking at this space, candidly, we were looking at it as a potential way to generate deposits to fund the rest of our banking activities. And honestly, most of the banks that have entered the space over the last couple of years, I think are approaching it the same way. They're, they're looking at our success. They're looking at the growth of the industry. And, and they're thinking, hey, this might be a source of deposits to fund, you know, the rest of their balance sheet. We, however,

• 4:58Speaker 02

  a couple of years ago, decided, well, actually about four years ago, we decided to go all in on, on this and, and it's really differentiated Silvergate. And what I mean by all in is at the end of 2017, we had just launched the CEN, the Silvergate Exchange Network. And I'm sure we'll talk about that a little bit more here in a minute. But the idea there was to really help our customers solve some pain points that they had around banking friction and 24/7 liquidity and counterparty risk. And as we launched the CEN and started seeing adoption, we just recognized that a lot of the other stuff that we had done historically was really, you know, candidly, a little bit of a distraction.

• 5:42Speaker 02

  Whereas we saw just this huge potential to really focus on helping our customers in this digital asset ecosystem, essentially help them scale their businesses. And so over the last four years, we've, we've sold our business lending unit, we've consolidated and sold our branch network with the exception of our headquarters office. Earlier this year, we sold the majority of our commercial real estate portfolio. And so today, Silvergate is really the primary bank for the digital asset ecosystem. We've talked about ourselves in the past as the on-ramp and the off-ramp, from the, the traditional banking system, the traditional financial world.

• 6:27Speaker 02

  Which operates during normal business hours, Monday through Friday. So we are the on-ramp from that world into the digital asset world, which as you know, transacts 24/7, 365 around the world. And, and then when people want to exit that digital asset ecosystem and go back into the TradFi world, as, as folks have started calling it, then we are that off-ramp as well. And we are institutionally focused. All of our customers are institutions. The send is a two-sided network. I don't want to get ahead of ourselves, but we primarily bank all the major cryptocurrency exchanges, all of the major institutional investors in the space, the OTC desks, et cetera.

• 7:08Speaker 02

  And our primary service under the send, the Silvergate Exchange Network, is to provide that 24/7 access to liquidity. And then a couple of years ago, we started lending against Bitcoin. And that's, that's created a great opportunity for us as well. And then we're working on a stablecoin. So everything we're doing strategically is focused on this digital asset space.

• 7:29Anthony Pompliano?

  When you look at the send volume, it's almost $200 billion in Q2, which is a massive number. Why are people finding it so valuable? Like, what has it changed on a day-to-day basis for the actual businesses that are leveraging this? Is it just a thing around faster and cheaper kind of transfer of payment? Or, or there are other benefits that they're really gathering to send $200 billion in a single quarter?

• 7:53Speaker 02

  Yeah, so what our customers are really doing there is they are using the Silvergate Exchange Network, the send, and our API capabilities. So, so when we launched this, we, we launched API first, and we've really encouraged our customers to code their tech stacks to our API. And, and then we've been continuing to enhance the API offering throughout the years to, you know, to, for instance, allow for the advancing against a line of credit against Bitcoin, to pay down the line against Bitcoin, et cetera. And, and so what our customers are using it for is to move instantly between the dollar, and I'm not talking about a stablecoin now, the

• 8:37Speaker 02

  Sand is not on a blockchain and candidly, it doesn't need to be on a blockchain. Because we're moving US dollars on behalf of our customers. Into and out of the digital asset ecosystem. One of the primary use cases and where a lot of the volume comes from is with the existing. Regulated stablecoin issuers in the United States and that's. That's obviously USDC issued by Circle, but it's also the Pax Dollar, the Gemini Dollar and two USD. And each one of those stablecoin issuers. Uses the SAN and our API. For the minting and burning or the creation and the redemption. Of the US Dollar backed stablecoins.

• 9:20Speaker 02

  And so what happens is when you have these periods of dislocation. That we experienced in the second quarter, which started with the Terra Luna thing. And then was exacerbated by Three Arrows Capital and Celsius and Voyager. When folks are trying to get out of. Out of tokens, out of this digital asset space, they want to go into dollars. And they can do that with the Silvergate Exchange Network 24 hours a day, seven days a week. And that differentiates us from most of the other banks even today that are coming into this space that don't have a similar. Kind of 24/7 capability. And as, as folks in the traditional financial world have experienced.

• 10:03Speaker 02

  In, in decades past, when there are periods of dislocation. When things happen on the weekends, for instance, globally. If there's something major, a global political thing that happens over the weekend. Oftentimes you can have this huge gap down in financial markets on a Monday morning. With crypto, with this whole digital asset space, it trades 24/7. So if folks want to get to the safety of the dollar, they can do that with the SAN. 24 hours a day, seven days a week.

• 10:29Anthony Pompliano?

  And with the send, are people able to leverage it with customers or partners or vendors that are not on boarded? Or is it something that is more kind of enclosed? And really what this gets at is like, how much of a flywheel and kind of, you know, selling point is this? Where eventually liquidity begets liquidity and you just keep collecting more and more customers joining send? Because if I'm a business, I'm on half of my vendors or partners that I'm conducting business with are on. I see the great benefit. I turn around and I tell the rest of my vendors or customers, hey, you guys got to get on here because this is how we do business now.

• 11:06Speaker 02

  Yeah, we have definitely experienced that flywheel, the benefit of this two-sided network where we connect exchanges and other liquidity providers to institutional investors. And you're absolutely right. Liquidity begets liquidity. And we see this especially so. And to be clear, I was just speaking a minute ago about like the stress in the market and the dislocations and folks wanting to flee to the safety, the relative safety in their eyes of the US dollar. However, on the flip side, we also have powered, you were talking about earlier, how, you know, we were a much smaller bank a couple of years ago.

• 11:50Speaker 02

  But through the bull market that we experienced through the pandemic years of 2020 and 2021, Silvergate was really powering the growth of this digital asset ecosystem as well. Because if you are a new market participant, if you're an institutional investor, if you're in a new exchange and you want to get access to other market participants, then you want to be on the Silvergate exchange network because that's where all the participants are. And in fact, we do very little outbound marketing. Almost all of our growth, our customer growth has been inbound inquiry and referral from new potential market participants who are looking at the space, decide they want to

• 12:34Speaker 02

  get in, they're starting to interact with different potential counterparties, and all roads lead to Silvergate. And they find out that if they really want to trade in the institutional market in this ecosystem, they really need to be on the send.

• 12:48Anthony Pompliano?

  Now, there is this Silvergate Exchange Network leverage. What is the leverage kind of feature or, you know, added functionality that you guys have put there?

• 12:57Speaker 02

  Yeah, so you're right. We call the product Send Leverage. And it is a Bitcoin collateralized lending offering. And it is Bitcoin only. And we are always in an over collateralized position. And importantly, we have taken control of the private keys. So we control the collateral before we extend the loan. We actually started looking at this back in 2018. And one of the things that market participants who have been in this business for a while will remember like the, you know, the cries from the institutional players back in 17 and 18 that, you know, for qualified custodians.

• 13:39Speaker 02

  The need for, for that, that term qualified custodian, somebody that the institutional investors can, can rely on to hold custody of the digital asset. And the way we started looking at this initially was, well, maybe Silvergate should become a qualified custodian. So that we can not only solve that problem for the industry, but then also be able to hold the collateral in support of lending against Bitcoin, which was something that we had our eyes on. But what we quickly realized is that the institutional players that are coming into this space, they're doing a lot of work ahead of time to try to figure out not only who are they gonna, you know, who are they gonna onboard with from their banking? And that's usually Silvergate. Who are they gonna trade with?

• 14:24Speaker 02

  And there's, you know, different OTC desks and other participants out there. And then where are they gonna hold custody of the Bitcoin and the other digital assets? And so what, what we decided to do was similar to the success of the SEN on the deposit side. We decided to create a network of qualified custodians. Who we, you know, so we actually vet them. We put them through our vendor management, vendor due diligence process to, to determine that they are a qualified institution to hold.

• 14:57Speaker 02

  The Bitcoin on behalf of our customers. And what we're trying to do there is make it so that if a market participant wants to borrow from Silvergate, they want to pledge their Bitcoin to us. They have choices. They can go to Fidelity Digital Assets. They can go to NiDig. They can go to Coinbase Custody. They can, they can use Bitstamp. And they can also use Anchorage. So we currently have five custodians with whom we work. And with each one of those, if a borrower wants to borrow against their Bitcoin, they place it with one of those custodians under a tri-party agreement. And then we will lend to US dollars. Now, we typically start at about a 65% loan to value

• 15:42Speaker 02

  on that Bitcoin, which, which means we're, we're way over collateralized. And then we would typically have a margin call or a reset of that collateral coverage ratio. When that margin gets down to about 75 to 80% loan to value, that's for an active market participant who might be trading the digital asset. If you're a balance sheet holder of Bitcoin, you know, whether that be a, you know, a Bitcoin mining company or some other corporation that has decided to hold Bitcoin in their treasury, we would typically start at a lower loan to value. And that's really for their benefit so that they don't have to be monitoring the collateral coverage ratio 24/7 to the extent that a trader might. But it's, it's, as I mentioned, it's Bitcoin only.

• 16:27Speaker 02

  We're always over collateralized and we have control of the private keys. And the reason that's important is, as I mentioned before, Bitcoin trades 24/7, 365. And if we get into a situation over the weekend where the price of Bitcoin is plummeting, we want to have, our customers need the ability to cover their margin either by paying down their loan or pledging more Bitcoin. And if they don't do either one of those, then we need to have the ability to sell the Bitcoin to correct that margin coverage.

• 16:55Anthony Pompliano?

  Yeah. When you look at this business, and I've invested in a number of companies that also offer, you know, similar types of kinds of over collateralized lending. It's basically asset-backed lending, but because you have the collateral in that. Private key ownership and you're able to sell fractions of the collateral into a highly liquid market 24/7. In some ways, it's better asset lending than pretty much anything else you could do. You know, looking at it from a pure lender standpoint, right? How do you guys think about risk management? Maybe with like Bitcoin backed loans or, you know, kind of over collateralized Bitcoin loans versus maybe other types of assets that you guys would lend against?

• 17:32Speaker 02

  Yeah, it's a great point. And in fact, I've said this many times before that, that I believe I've been in banking for 40 years. I started in banking as a teller while I was in college. And so I've done, you know, a lot of the jobs inside a bank that you can conceive of. I came up on the financial side, but I also, you know, did some lending back earlier in my career. And I believe that Bitcoin collateralized lending is the best lending I've ever done in my 40 year career. You know, you've, you've heard some of the folks that are much more articulate than I am talk about Bitcoin as pristine collateral. I absolutely believe that to be the case.

• 18:10Anthony Pompliano?

  Yeah, it's, it's pretty incredible. Talk to me about the actual performance of the business. So in Q2 of 2021, I think you guys did about 20 million or so in net income. You just announced 38 million in net income for Q2 of 2022. So kind of over a one year period, incredible growth in that income. What's driving most of that? And how do you think about kind of net income growth at a time where asset prices in the crypto space have drawn down significantly? We've seen a lot of companies do hiring freezes, layoffs, just kind of tough bear market conditions. But it seems like Silvergate continues to produce pretty strong financial returns on the net income basis.

• 18:48Speaker 02

  Yeah, we, we really, I think, benefit from being this critical infrastructure for the ecosystem. And whether the market is rising or whether it's under stress.

• 19:04Speaker 02

  Customers, market participants still need access to our banking rails. And a couple of important distinctions. Number one, we don't charge for the send. So when we see big volumes going up, we're not making more money on send transactions. And if volumes are going down, we're not making less. And the reason for that is because this is an API-enabled ledger transfer on our books. Essentially, once we set this up, it's zero cost to us. And so we pass on that, that, that savings to our customers. So we don't charge for send. So then how do we make money? Well, we certainly benefit from a growing deposit base. And we, and we don't pay interest on those deposits.

• 19:47Speaker 02

  And so that's kind of the second key differentiator is that we don't pay interest. Now, this is not just because we're, we're trying to be stingy. It's, it's really because our customers need to have the ability to access every last penny of their liquidity 24/7. And so that means we, we can't go out and lend these deposits. You know, we're not making, you know, seven to 10-year commercial mortgage, you know, commercial real estate loans. We're not, we're not, we're certainly not making 30-year mortgages. And so we need to keep these deposits short. But we obviously do need to earn some yield because that's how we cover the costs of the regulatory compliance and, and everything that, you know, that underpins our offering

• 20:31Speaker 02

  and allows us to continue to service our customers. So when interest rates are going up and deposits are also going up, then we get that kind of double benefit. But having said that, we've also been adding quite a bit to our team. You know, the last time you and I met, we probably had a little under 200 employees. We're, we're probably around 400 now. And that's to keep up with all of the, you know, the regulatory requirements, the BSA, anti-money laundering, and then also to continue to, to build the, you know, some of the services and the new products that we're offering or, and, and contemplating offerings such as our stablecoin. And, and so it's, it's really, it's, it's interesting.

• 21:14Speaker 02

  Earnings on the reserves, you know, and then it's a growing deposit base and then being mindful of of not, you know, not over hiring. And and we really do believe, by the way, Pomp, that we have a business model that can make money in good times and in bad. And I think we're we're just now starting to prove that out. Because if you think about it, our our earnings, our deposits were growing, our earnings were growing during the, you know, during the crypto bull market when interest rates were zero. And then what happens is interest rates start to rise, deposit growth slows down. But now we're making more money on the net interest income. And when this turns around, as it always does,

• 21:55Speaker 02

  then interest rates will start coming down. So we might be earning less interest on those deposits. But then hopefully the the digital asset market is growing again. So we have growing deposits. And then it's all underpinned by a really strong risk management framework. And that gets back to kind of the send leverage piece. You know, we talked earlier about how I believe send leverage is some of the best lending we've ever done. And this is a new asset. It's a new asset for the world, obviously. It's certainly a new asset for for the banking system, a new asset for Silvergate. And this, you know, we we're really focused on continuing to be able to grow that business, which then allows us to put deposits

• 22:39Speaker 02

  from this ecosystem back out into the ecosystem by lending back to the market participants who are already benefiting from the deposit side of the send.

• 22:49Anthony Pompliano?

  And when you start to look at the performance of the business, obviously, there is the macro crypto market. There's also the macroeconomic market kind of globally. And it really feels like we're in a weird time, right? That we see, obviously, the Federal Reserve talking about and creating tighter financial conditions. But we also have strong employment. We have consumer spending staying high. We do have plenty of companies in the crypto industry that are continuing to hire. They're still raising capital. They're still conducting lots of transactions. How did you all break out in your analysis of these situations and ultimately the financial performance of the business? Kind of crypto market dynamics or kind of macro in crypto versus the actual macroeconomic environment?

• 23:32Anthony Pompliano?

  And kind of what the Fed would be doing in the more traditional market? Like, do you separate those out? Or do you try to evaluate it as one holistic market that you're trying to serve?

• 23:41Speaker 02

  Yeah, we, we really don't look at it. We don't separate it out. We, we absolutely need to be mindful of, of, um, you know, what the Fed is doing, obviously. I mean, um, the entire world waits, um, for, you know, for what we're all going to be waiting for now this week. Um, you know, on Wednesday afternoon, when the chairman of the Federal Reserve comes out and announces to everybody what, what they're going to do with interest rates. And, you know, the market certainly has an expectation of, of what's going to happen. Um, and then they're going to come out and, and so we're absolutely watching that, you know, certainly the, the geopolitical stuff going on, you know, the, the, the war between Russia and Ukraine.

• 24:23Speaker 02

  Um, and then inflation is rampant around the world. So all of these things have an impact. Um, but the way we try to synthesize it is, okay, how do these things impact our business? And we've really, over the last few years, simplified our business. Folks, um, I think on the, from the outside looking in, think that, man, those guys at Silvergate, they're, they're really taking a lot of risk. We don't believe that to be the case at all. We have a deposit offering where we are providing deposit services to a new industry that is absolutely just going to keep growing up and to the right. It's going to be volatile, um, but we don't believe this is going away.

• 25:03Speaker 02

  And so we have a very strong position in a new, growing ecosystem. So that's step one. And then, you know, we just have to make sure that we are in constant dialogue with our regulators to make sure they understand as we contemplate offering new products. And then we have to have strong risk management. And if we can do that, I think, you know, one of our, our, our board members several years ago, uh, as we were coming out of the, the, the financial crisis of 2007 and 2008, I joined, by the way, I joined Silvergate in December of 08, right at the height of, of the financial crisis. I, I was attracted to Silvergate, even though it was very small. I was attracted to Silvergate because of its risk management, its historic risk management.

• 25:48Speaker 02

  We've had very little losses. Over the years, we've been profitable consistently for over 20 years. And that goes right through more of a traditional kind of banking model to this now digital asset model. And it's because I think we have a very strong risk management culture. And we always look at things through the lens of how do we make sure that we don't lose money? And, and, you know, people would think that that's kind of a crazy juxtaposition. When we're saying we're lending against Bitcoin and we're open for business and we want to keep growing that line of business. But it's because, you know, we believe we can do it in a way where we're not going to lose money.

• 26:28Anthony Pompliano?

  You recently in the earnings report were quoted as saying, "Our balance sheet is optimized for client liquidity and risk management practices are at the forefront in all aspects of our business to ensure we are prepared for any market environment. I remain confident in our trajectory throughout the second half of 2022 while continuing to invest in our strategic initiatives." Talk a little bit more about how you view the balance sheet of the business and kind of the importance given, you know, just so many different moving factors right now. And we've seen other banks as well, maybe JP Morgan, they've paused share buybacks. And they started to talk about balance sheet strength and, and really, hey, we don't know what is on the horizon. It seems to be something that Silvergate has always taken pride in doing.

• 27:09Anthony Pompliano?

  And so what's kind of the philosophy on the balance sheet and kind of being prepared for anything in the future?

• 27:16Speaker 02

  Yeah, so it's, it's really thinking ahead to that, that question of how do we make sure that we don't lose money? And, and there are multiple ways that a bank can lose money. Most, most folks think about credit risk. And we spent a little bit of time talking about that with the send leverage business. But the primary way that, that most banks historically have failed is actually not credit, it's liquidity. And, and so when we got into this, this bit, this business banking Bitcoin companies and then creating the send, we recognized what I said earlier, which is that our customers need to have access to their liquidity 24/7. And we need to run the bank as if.

• 28:01Speaker 02

  All of these deposits on the send could go away. And, and that's not typically the way most banks run their business. And, you know, and, and in fact, their most bank, I mean, this is just the, you know, this is the fiat banking model. This is, you know, this is essentially maturity transformation where historically, banks will take in short-term deposits. They'll, they'll make longer-term loans with the bet that all the deposits, all the depositors aren't going to show up and, and, you know, demand their money back. We run this business as if our customers are in fact going to come back and ask for all their money back.

• 28:44Speaker 02

  And therefore, you know, we have a loan to deposit ratio. One of the metrics in banking is a loan to deposit ratio. How, how many, how much of your deposits are you lending out in your loan portfolio? Historically, banks, and when they're fully lent up, they're at an 80 to 90% loan to deposit ratio. 80 to 90% of their loans, or excuse me, of their deposits are out in loans. Silvergate runs at less than 20%. And, and the primary reason for that is everything I, I just mentioned a moment ago. I, we had a call last week with a, with an investor after we released earnings, who asked, you know, do you, do you think that you can get your loan to deposit ratio up

• 29:27Speaker 02

  over time as these deposits are more sticky, et cetera? And, and my candid response was, we don't even think about it that way. We don't, we are not measuring our success the way traditional bankers measure their success. We're very much focused on how do we solve problems for our customers? How do we make sure that we're up 24/7, 365? They have access to their liquidity 24/7, 365? And, and so, you know, that, when we talk about risk management, that's one of the key features. It's not just the fact that we're over collateralized in our Bitcoin lending.

• 30:01Anthony Pompliano?

  When you think about those strategic initiatives moving forward, what are the one or two things that you feel are, you know, absolutely essential for Silvergate to continue to thrive in any environment?

• 30:12Speaker 02

  Yeah, so the the next big thing for us is is the stablecoin initiative. And you know, to to take a step back for just a second, when I first discovered Bitcoin in 2013, I was reading about it just at a popular level. I'm not a, you know, not a coder or anything. But the meme that was there at the time was with Bitcoin, you could be your own bank. And so I looked at that being a career banker, and I thought, well, gosh, I wondered how that works. And so I was curious, and I bought a little Bitcoin. You know, and it was a little over a hundred bucks at the time in October 2013, and I saw it run up. And of course, anytime someone buys low and they see this big price pop, that you know, it it piques your interest even more. But as I was learning more about it,

• 30:57Speaker 02

  the belief that I came to personally was that if this takes off, then it could be huge. This could be the next thing. This could be what what I personally could work on for the rest of my life, for the rest of my career. It could be game changing for Silvergate. And so those those were kind of like aha moments for me. But the other thing that I recognized is, okay, let's assume that someday everyone can be their own bank. That's going to likely take decades. And between now and then, these different market participations, participants are going to need access to the traditional financial system. And I don't believe that the US government is going to ever give up the dollar.

• 31:42Speaker 02

  I don't believe other sovereign nations are going to give up their own fiat currencies. And so what we intend to do is be a bridge between the traditional financial system and this Bitcoin digital asset ecosystem. And the primary next step, we believe in in our evolution is for the issuance of a a bank issued US dollar backed stablecoin. We purchased the protocol, the digital, the the protocol and the regulatory compliance elements of DM earlier this year. And that would initially start out as a permissioned payment system.

• 32:22Speaker 02

  So that we can launch our own US dollar backed stablecoin. But we also look at what other folks are doing with with open protocols right now. And and we believe that those should be able to continue to thrive. And so in a future state for Silvergate, I, you know, our hope would be that we would continue to be critical infrastructure, support the entrepreneurial efforts of the folks at Circle issuing USDC and all the other market participants. And then we would issue our own, our primary focus is on a stablecoin for payments and for cross border remittance as opposed to just focused on digital currency trading. But so that's a long winded way of saying the next thing for us is is a US dollar backed stablecoin.

• 33:07Anthony Pompliano?

  What's the risk for a bank starting to do this, right? One of the things that we obviously saw in the crypto market is there's a lack of disclosures. There's all sorts of regulation that is likely on the horizon. And it's because when you start with no oversight, no regulation, any seems, you know, like a big leap forward. Right? Obviously, as a bank, you're federally regulated. You already are, you know, kind of overseen by a number of different organizations. What changes for you all or what risks do you see being introduced by going from kind of, we'll call it the traditional dollar based system to actual US dollar stablecoin type product or functionality for you and your customers?

• 33:44Speaker 02

  Yeah, I really appreciate that question because as new market participants come in, you know, folks often ask me, they think, Gosh, are you worried that this bank has come in or this other bank has come in? And and my honest answer is absolutely not. I'm not worried about it at all. In fact, if no other banks ever come in and bank this ecosystem, then I was wrong. We were wrong at Silvergate. This, this wasn't a good idea because there's no way that little old Silvergate can can be the only bank in this new digital asset ecosystem. The concern that I that I do voice, though, is I I hope that they're doing it right.

• 34:24Speaker 02

  So when a new bank comes in, I really hope that they're building a strong compliance program that that they understand. And the different types of uses of these digital assets and they're building a framework so that they can in fact, in fact, bank the ecosystem in a regulatory compliant, safe and sound manner because if one of them gets a black eye, then it's going to reflect on the entire banking system, not dissimilar to the way that some of the challenges that Celsius and Voyager have had, you know, have, you know, kind of set the whole ecosystem back a little bit here. I think um, we'll push through this and um, the industry will be stronger um, as a result, um, but it's not without some pain.

• 35:05Anthony Pompliano?

  Yeah. When you think about your own personal uh, kind of journey through uh, through crypto and as you took a bank that uh, as you mentioned was, you know, small, you helped navigate the global financial crisis, you came out, you all began to uh, to grow the business, eventually I had the courage and conviction to enter into the crypto market. You've experienced uh, bull and bear cycles now. What are some of the lessons that you've taken away or some lessons learned uh, over that time as the head of a bank that, you know, is probably the leading bank when it comes to crypto in the United States today?

• 35:35Speaker 02

  Yeah, I appreciate that. Um, you know, one of the biggest things is, is to really try to understand what each one of these new market participants is trying to accomplish. Um, I remember back to the, you know, the 2017 ICO craze. Um, and you know, we, we did very little, you know, we, we didn't bank, you know, the um, the, all the new ICOs coming on the scene. Now, we were banking some exchanges and they were making markets in some of those tokens. But you know, we had the opportunity to potentially bank some of those, those ICO issuers.

• 36:15Speaker 02

  Um, but we were, you know, we were concerned about, okay, are these securities, you know, um, that, that was when the, you know, the Howie test and you know, all that stuff really started to, to come on to everybody's radar in terms of um, you know, what type of regulation should be applied to this, to this new thing. You know, fast forward a few years and you know, and, and we've got DeFi and we've got NFTs. And um, from my perspective,

• 36:41Speaker 02

  The original DeFi is Bitcoin, and Bitcoin is still the only true DeFi. There are a lot of other things trying to be decentralized finance. And, and some of that stuff worked really well, um, you know, in terms of some of the loans that, you know, that were locked up um, on some of the, you know, the DeFi protocols, um, and we don't need to go there, but you know, it's been pretty well documented. That some of that stuff worked well, but it's still not decentralized the way that Bitcoin is decentralized. So I, I think it's, it's about really trying to understand what are these different protocols trying to accomplish? And not trying to chase everything, but you know, let it kind of play out, you know, we're, um, we are kind of on the cutting edge, if you will, because we're lending against Bitcoin.

• 37:26Speaker 02

  But we didn't launch that until January of, of 2019. After we had started banking this ecosystem in January of 2014. So it took us five years of learning about the industry, learning about who the, you know, the, the real quality market participants are, um, and you know, interacting with this ecosystem, learning the technology, learning about how we can help because you know, we don't have a whole bunch of blockchain engineers inside Silvergate. We have a whole bunch of folks who, who have gone deep down and understand blockchain, but at their core, they are bankers, uh, understanding how to build banking technology into this new blockchain Bitcoin space.

• 38:10Anthony Pompliano?

  Yeah, it's, uh, it's kind of fascinating what you all have done. And you straddle a line so beautifully between the traditional world and, and the new world, uh, which is obviously why most of the people in the new world, uh, love, uh, working with you. And, and I will say as well, uh, as, uh, you know, um, we've had companies that I've invested in, they've had their banks, account shut down, et cetera. You all are always there to, uh, to kind of step in and, and be helpful, which I know that, uh, the, the market appreciates. I want to do a couple of rapid fire questions, uh, with, with the theme of, uh, kind of bear markets and, and just whether it's, uh, traditional global financial crisis type stuff or crypto bear markets. Is there one book or documentary or movie or something that you would point to for a lot of young people who listen to this?

• 38:54Anthony Pompliano?

  And they say, hey, I'd love, I'd love to kind of gain experience. Uh, I haven't lived through this before. Is there something that you would point them to as a resource to kind of go learn, uh, read, listen, watch, uh, that you think could be helpful?

• 39:05Speaker 02

  Yeah.

• 39:08Speaker 02

  Actually, I'm gonna just go with a, I'm gonna go with Lynn Alden. What I would say is, is just start reading Lynn Alden. You can almost start anywhere, but, but, but maybe start current and work backward. But she's just, she is so smart, so articulate, and also readable. You know, I mean, you can read the stuff that, that Lynn writes and, and really, I mean, hey, if I can understand it, then, then I think anybody can understand it.

• 39:42Anthony Pompliano?

  That, that is a fantastic answer. When you think about going through these bear markets or kind of financial crisis recessions, what are the data points that you pay attention to, either in the traditional world or in, in the crypto world? Are there like two or three things when you wake up in the morning, you go and you check, that, that kind of signal, hey, this is really important and helps you understand kind of where the market is on a day-to-day basis?

• 40:04Speaker 02

  Yeah, I'm, I'm always looking at, at, obviously, the price of Bitcoin. I'm looking at the, at the 10-year Treasury. And then, you know, more, more recently, over the last couple of years, I've started looking at the two-year Treasury. And, you know, the other resource that I would mention is Nick Badiya. And, and, you know, he, he wrote a book called Layered Money, which, which I think is, is just fantastic in terms of understanding, you know, money and, and, you know, you get into these different protocols. But he's done some great work here recently, you know, kind of looking at what the Fed is doing and how the Fed is always kind of chasing the market. And the, you know, the two-year Treasury is kind of that, that, that short-term indicator to watch.

• 40:47Speaker 02

  And, and, and so I will tell you, Pom, even though I've been doing this a long time, I've learned more about money and economics and how things work since I got into Bitcoin than I learned in the first 30 years of my career.

• 41:02Anthony Pompliano?

  I have an economics degree, which, you know, basically is worthless in, in the real world. But, but same thing, I've learned more about all of that as well. And it goes back to skin in the game, right? You just, you, you really pay attention, you really understand. Last thing is, over the years, as you've gone through bull and bear cycles, has anything changed about your daily routine or sleep schedule, diet, anything like that, that you've said, hey, you know, when I know that we're getting into tough times, I change this?

• 41:31Speaker 02

  Well, thanks to you, a couple of years ago, I got an eight sleep.

• 41:35Anthony Pompliano?

  Oh, amazing.

• 41:37Speaker 02

  Yeah, so there you go. I also got off Twitter a couple of years ago. And it was just because it became so overwhelmingly time consuming to kind of keep up with everything. I will admit that back in April and May of this year, I got back on because there was so much, you know, going on with Terra Luna and Celsius and everything that I felt like I needed to have that real time, you know, kind of real time access to information. And there's nothing better than Twitter for that. But I've started to wean myself back off again because, you know, if you don't really need to be on it 24/7, if you've got confidence in your business and you feel like you understand the risks,

• 42:22Speaker 02

  then you can kind of just wait for the next post by Lynn Alden or Nick or, you know, occasionally something coming out. You know, you're obviously a great resource, as are some of the other Bitcoin podcasters. So I've shifted back to kind of just doing more podcasts and less Twitter. But I do try to get seven to eight hours sleep every night on that eight sleep.

• 42:50Anthony Pompliano?

  I do think bear markets, they remind folks, like, it's fun and it's like the ultimate dopamine rush when prices are going up and everyone thinks they're getting rich and, you know, all this stuff that happens in bull markets across all asset classes, right? It's not specific to crypto. It happens in stocks and everywhere else as well. And then bear markets, people are like, damn, spending four hours a day staring at an infinite doom scroll is probably not the the best thing for me to be doing from a productivity or like a psychological standpoint. So I will, I will use you as aspiration to wean myself off a little bit over time. Where can we, yeah, exactly. Where can we send people to find you on the internet now that you're not spending as much time on Twitter?

• 43:33Anthony Pompliano?

  And where can we send folks, maybe if they want to learn more about Silvergate, either from the financial performance of the business or if they want to potentially become a customer for some of the products that you

• 43:41Speaker 02

  Yeah, actually just silvergate.com. We actually even got got rid of the silvergatebank.com URL. I mean, it's still, you know, you can still find us that that way, but silvergate.com. Best best place to find either myself, if you want to learn more, obviously, we've got an investor relations page there. You know, we are a public company and, you know, and then also if if you want to learn more about our product offerings, if you want to open an account, the account opening process is all digital. We went fully remote, Pomp, as everybody did pretty much during the pandemic. But we made a decision very early on, within the first 60 days, that we weren't going back to the office,

• 44:21Speaker 02

  that our customers are 24/7/365, they're global, and so is our so is our workforce now. And so we actually have employees in over 30 states and and some international as well. And so the best way to find any of us is is to start at silvergate.com.

• 44:38Anthony Pompliano?

  Yeah, I I suggest people go check it out, and thank you so much for taking the time to do this. It is pretty incredible to watch somebody straddle that line between traditional finance and the Bitcoin crypto industry. But as as you guys are proving, it is possible, and hopefully it'll be a compliment to you all when more of your competitors kind of follow suit, which I think we both think is is likely to happen at some point.

• 45:02Speaker 02

  Absolutely. Well, I really appreciate that, Pomp. It's it's it's been a great, it's been fun, and I think the fun is is going to continue. And some of some sometimes even the pain can be fun, right? I mean, you just you just got to get through it. I mean, no pain, no gain.

• 45:17Anthony Pompliano?

  That that is a a great place to wrap up, my friend, and there are no truer words ever spoken. So I appreciate you taking the time to do this. I know the audience always enjoys hearing from you, and we'll definitely do it again in the future.

• 45:28Speaker 02

  All right. Thanks a lot. Take care.