Five years ago, when bitcoin was still at the fringes of mainstream awareness, Silvergate invited in young crypto exchanges and asked them what problems they were trying to solve and how the bank could be helpful.
In order to do business with them as a state chartered bank, Silvergate needed the California State Banking Department on board as well as the Federal Reserve Bank of San Francisco. In the summer of 2014, they brought the two regulators in and put on a presentation on bitcoin.
“That open communication with the regulators early on has proven to be really foundational,” Lane said. “We’re very collaborative with the regulators, we ask them if they have suggestions, and what we can do better.”
Silvergate has a track record of timely reinvention. The bank was founded as a thrift in 1988. Less than a decade later, current Chairman Dennis Frank, an ex-Goldman Sachs banker, reorganized it into a bank.
Frank had left Wall Street during the savings and loan crisis of the late 1980s to buy up failed thrifts through Houston’s Coastal Banc. After selling Coastal in 2004, he moved on to California, where he would recruit investors from his Goldman days to invest in, and re-capitalize Silvergate in 1996.
Under Frank’s leadership, Silvergate stopped its mortgage operations in 2005 before the subprime meltdown. And when the 2008 financial crisis hit, the bank was in a solid position to lend as many other banks were paralyzed by bad mortgages on their balance sheets.
That’s when Frank asked Lane to come in as CEO. By then, Lane had worked his way up in the industry through several executive positions: CFO of Independence One Bank, CEO of Business Bank of California and president of Southwest Community Bancorp. Lane also had a two-year stint as a professor and co-founder John Paul the Great Catholic University in San Diego.
Lane recalled Frank telling him, “I’m a Wall Street guy and I need a banker as a partner, would you join me?”
Silvergate’s ability to stay profitable during the financial crisis meant it had no shortage of lending opportunities, Lane said, but the problem was getting enough customer deposits to fund those loans. Silvergate looked to cryptocurrency companies to fill that gap.
Major Silvergate clients include the Winklevoss twins’ Gemini exchange, Paxos, bitFlyer and Kraken.
David Ripley, COO of Kraken, said in an email, “For the most part, the larger banks in the U.S. have stayed away from banking cryptocurrency businesses. In the U.S. and particularly Europe, we see smaller, more technologically advanced banks partnering with cryptocurrency businesses.”
About half of the bank’s shareholders are betting that crypto is the way to go, too. They and some other investors contributed to $114 million in order to expand Silvergate’s cryptocurrency businesses. Lane said the investors were drawn in as a way to invest in cryptocurrency without looking for the next new token.
“We’ve got institutional investors who traditionally invest in banks, and they just liked this strategy,” Lane said. “They’re looking to get exposure in the asset class via something they understand.”