Silvergate's Alan Lane on Banking the Corporate Unbanked

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“I think we are probably the first bank in the world to bring the traditional banking system that’s open 40 hours a week Monday through Friday and bring it into the 24/7 crypto world.”
— Alan Lane

Location: San Diego
Date: Tuesday, 16th July
Company: Silvergate Bank
Role: CEO

Since Satoshi’s left the message, "Chancellor on brink of second bailout for banks" in the genesis block, Bitcoin has been the antithesis of banks. “Be your own bank”, perhaps an overused phrase from Bitcoin proponents certainly comes under question for companies building Bitcoin-based businesses. Businesses need Fiat for operating costs: rent, wages etc. and for now, at least that is a gap that Bitcoin can't fill. 

Most banks have also looked at Bitcoin unfavourably, and crypto companies have struggled to find reliable banking partners. Many companies and exchanges have unexpectedly lost banking services or turned to creative solutions.

Silvergate Bank, however, looks at Bitcoin and cryptocurrency differently. Since 2014 they have been building their reputation as the leading bank for cryptocurrency companies and now have over $1 billion in deposits. In this interview, I talk to Alan Lane, Silvergate's Chief Executive Officer and find out how they have been paving the way for cryptocurrency companies and are how they are offering banking services previously unheard of in the traditional industry.

TIMESTAMPS

00:05:34: Introductions 
00:05:58: Background to Alan and how he ended up at Silvergate
00:09:28: Touching on how Silvergate has grown since Alan joined 
00:11:48: Exploring Silvergate’s first crypto customer and their introduction to Bitcoin
00:16:17: Discussing why Silvergate took the plunge on working with crypto companies initially
00:22:14: Exploring why other banks were comfortable banking crypto customers
00:28:09: Touching on if KYC/AML regulation has been a deterrent to committing crimes
00:29:31: When did Silvergate realize that things were taking off for banking crypto companies?
00:32:33: Discussing problems that Silvergate have solved, including the SEN and their API tech
00:39:34: Exploring the movement of real money and whether it is just moving numbers in databases
00:42:14: Delving into some of the challenges that Silvergate face banking crypto companies
00:45:32: Discussing the possibility for custody and credit products in the future for Silvergate
00:47:57: Exploring the concept of a future bank account with Pounds, Dollars and Bitcoin within
00:52:04: Discussing whether regulation has improved the banking industry
00:57:51: Alan’s views on Libra and his thoughts on how the regulators have reacted to it
01:04:18: Final comments and how to stay in touch

 

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TRANSCRIPTION

Peter McCormack: Thank you for having me here.

Alan Lane: Absolutely.

Peter McCormack: We met at Consensus, where you came and found me in the corridor and had a conversation!

Alan Lane: I tracked you down!

Peter McCormack: Here we are, so thank you. Thank you for having me. I think people are going to find this really interesting. One of the things I do, I always try and think of the topic and the show title beforehand. This one is kind of, "banking the unbanked". Common crypto term, right?

Alan Lane: There you go!

Peter McCormack: It's the "corporate banking the unbanked". I think a really good place to start though would be for people to know your background, how you ended up at Silvergate and then also let's go into the background of Silvergate and then let's explore.

Alan Lane: Sure! Well yeah, thanks for making the trip and welcome to Silvergate. So I actually started in banking as a teller while I was in college back in 1981, so I've been doing this a long time! That'll tell you how old I am.

Peter McCormack: Well I was three!

Alan Lane: Over my career I've done just about every job you can do in a bank. I came up on the finance and accounting side, but also did some lending back in the day. In the 90s I actually spent several years in private industry. I left banking, one of the banks I was working with had sold and I spent several years working for companies in retail manufacturing as CFO and or CEO, and got a little bit of a reputation as a turnaround guy. I went into companies that were having trouble and tried to help them figure that out.

Then in the late 90s I got back into banking and that experience working in private industry served me really well when I transitioned back into banking, because as I was banking businesses, I could really truly say that I had been in their shoes and dealt with some of the issues that they had dealt with. But I kept coming back to banking because it's kind of my first love. It's got that combination of math and there's obviously an undercurrent there with Bitcoin. People, I really love working with people and I love business. So putting all that together in community banking, that's really where I kind of found that it all came together.

I joined Silvergate in 2008, right at the height of the financial crisis. I had actually met the chairman and founder, his name is Dennis Frank. He's still our chairman and I had met him at the end of 2006 and we were likeminded. He actually was one of the few that saw the financial crisis coming and many folks might say they saw it coming, but Dennis and this board here at Silvergate put their money where their mouth was, where they actually were saying no.

They had kind of cut back on some of the lending, some of the excesses that were going on and so the bank was actually shrinking a little bit in 2006, 2007, going into 2008. But what I saw here was just a really solid but small, healthy bank and Silvergate's board was looking to be one of the banks that kind of helped during the financial crisis.

So I joined in December of 2008 and we immediately started... Most other banks couldn't land, many banks were struggling with bad loans, Silvergate didn't have many bad loans. So for the first few years I was here, any opportunity that we wanted to go after in the lending area, was pretty much wide open for us. So that's kind of how I went from being a teller, through to joining Silvergate 30 years later.

Peter McCormack: What was the shape of the business then, in terms of how many people did they have and what was the primary business channels and customers?

Alan Lane: Sure, we had about 40 employees, so it's very small and a total assets, were a little under $300 million. So very small but clean and a really good group of folks here. I've told this story many times, it was probably the one of the easiest transitions into a new job I've ever had.

I immediately felt welcome and just really felt like and you've seen the place now. We've tried really hard not to let that change it. This is still a family and we've got over 200 employees now, but it's still really... One of our core values is work hard and have fun and people enjoy being here.

Peter McCormack: So that's about 500% growth in staff since you've been here? So that's pretty big growth. Has the majority of that growth been in the last five years? We'll obviously discuss why I'm talking about five years.

Alan Lane: So I would say during the first five years... So we grew from that roughly $300 million in assets to almost a $1 billion in assets. So we were maybe around $800 million or so in total assets, before we started dabbling in providing banking services to cryptocurrency companies.

Peter McCormack: What is the total size of the assets under management now?

Alan Lane: We're right around $2 billion in assets.

Peter McCormack: So that's a big number. I believe, is it something like around $800 million of that is crypto?

Alan Lane: It's actually bigger than that, it's over $1 billion in deposits related to the cryptocurrency industry. It's funny that we call it crypto, that's what everybody calls it these days. But when we got started, it was pretty much Bitcoin. The very first regulatory presentation we made to our regulators, in the summer of 2014, it was Bitcoin.

Peter McCormack: Well, I think that's going to come full loop and that's going to be part of the conversation we're going to have today. But I guess you as a business, you can't take a position on which assets you believe in or not. You bank companies and as long as companies are following the correct regulations, you're not going to choose a company, whether it's Bitcoin or Ethereum, you can't do that.

Alan Lane: You're exactly right.

Peter McCormack: All right, so let's go back. So 5 years ago, 2013, that's the first time I discovered Bitcoin. For one reason or another, you became exposed to the cryptocurrency industry through Bitcoin and you made a decision to say, "okay, we're going to support companies here." What was happening? Had somebody brought it to you? Had somebody asked to bank you? Talk me through the first customer, you don't have to name them!

Alan Lane: Sure, well I don't mind naming the first customer because it'll be a well known name, but I'll take you back a little bit to still kind of the financial crisis. Here in the US, we had what was called Occupy Wall Street, you remember that?

Peter McCormack: I was there. I actually visited and somebody tried to sell me a painting of the... It was the guy who was running Lehman brothers, can't remember his name anyway, I remember it!

Alan Lane: So that was not just in New York or in Washington DC, but there were folks that were active in that movement in San Francisco and Los Angeles etc. I was at a banking conference, I don't remember what year this was, it was probably 2010 or 2011 and the Occupy Wall Street folks came into the hotel, into the ballroom where this conference was being held and they were essentially trying to disrupt the bankers.

So there was security there and everything, so as that was happening, there was a young lady in front of me at this conference. So we're all standing around, "what are we going to do?" So I introduced myself to her and it turns out that she was with a company called Second Market.

Peter McCormack: Barry Silbert's company?

Alan Lane: Yeah, that's right and the reason she was there is because Second Market, and I'm sure your listeners will be familiar with it, but prior to getting into Bitcoin, one of the things that Second Market was doing was obviously they were providing liquidity to illiquid stocks and illiquid investments.

One of the things they were evidently exploring at that time was, would there be an opportunity to provide liquidity to illiquid privately owned banks and Silvergate is a privately owned company. So I struck up a conversation with her, we ended up developing a business relationship over a couple of years. So Second Market got to know Silvergate as a bank that was maybe a little bit niche, a little bit non-traditional.

So somewhere along the line, as they transitioned their business to focusing on Bitcoin and cryptocurrency, they reached out to us in 2013 and they essentially introduced somebody to us who was looking for a banking relationship. Coincidentally, our chairman, Dennis Frank had several months earlier, he had sent me some kind of an infographic on Bitcoin and Bitcoin mining etc and he said, "hey, this looks interesting" and I looked at it and dismissed it as most of us did initially.

But then when it came through Second Market, I thought, "well, we should take a look at this." As I dove in a little bit more, I discovered that there were real companies that were raising venture money and they were trying to provide services to this fledgling Bitcoin industry and they were getting kicked out of banks.

So that was really the start of it, was in 2013, we started educating ourselves on it. I said, "well, how would I buy some?" I try everything. So I figured out how to buy some online. I followed the money to see where it went and so I bought my first Bitcoin in October of 2013 and wish I would have bought a lot more!

Peter McCormack: We've all been through that!

Alan Lane: But that was the beginning of the journey and it was really kind of my interest in math and technology intersecting with banking and essentially banking businesses. That's how we started.

Peter McCormack: Right now I've read that you have, is it 542 crypto clients? That's a great piece of business. But at the time you're taking your first one, you're talking about taking on one client. So whilst everybody else is dumping crypto companies for obvious reasons, the fear, lack of regulation, why is it you turn around and said, "we're going to give this a go." Was it because you had the foresight to think it would grow or was it just that you wanted to treat each customer individually and let's try and bank this one customer?

Alan Lane: So it was a little bit more than just banking that one customer. I mentioned earlier that we've built a successful business niches at Silvergate. So we're always on the lookout for niche opportunities and as I mentioned earlier, coming out of the financial crisis, we were growing fairly rapidly on the loan side, but Silvergate was not a traditional community bank. We didn't have a lot of branches, we only had four.

So we were really looking for deposit funding to fund the loan growth. So when I looked at Bitcoin companies through the lens of these are companies that are not doing anything illegal, they're not doing anything immoral, they're raising money from reputable venture companies, they have US dollars they want to deposit in a bank and they're getting kicked out of banks.

So initially it was really that simple, is this looked like an opportunity. So the first thing I did though, was I called our compliance officer and I said, "hey, have you ever heard of Bitcoin?" And she had, and she had read about Silk Road.

Peter McCormack: All the other healthy things!

Alan Lane: That's right, exactly. But we always take regulatory first approach on things, we have to, that's our business. We're an FDIC insured regulated depository at the end of the day. So we're a state chartered commercial bank, so we're chartered by the state of California. We're a member of the Federal Reserve and our deposits are insured by the FDIC.

So the first thing we think about is, "okay, is this business legal? How is it going to be regulated and is there an opportunity?" So it was really the business opportunity for maybe bringing in some deposits and can we do it in a regulatory compliant, safe and sound manner?

Peter McCormack: Could you answer "yes" to all those questions at that time? Or was it a little bit grey?

Alan Lane: So our timing was really good and that's pure luck. Sometimes things happen in life. There was FinCEN guidance that came out in May 2013. So as we're looking at this in the summer of 2013, so I bought my first Bitcoin in October, but there was probably three months or so worth of intense research leading up. So late summer of 2013, one of the first things we do is "okay, what regulations are out there?" FinCEN had issued guidance. So we look at that and we start looking at how will the regulators, regulate this activity. So no, we couldn't answer the question immediately.

So what we did, was we sought guidance. One of the great things about the team we have here at Silvergate is we actually look at the regs and try to understand how they're applied. I've been with other banks and not to knock anybody else, but oftentimes there's a couple different layers of consultants and lawyers who provide you interpretations and our folks actually dig into the regs. Then we have one on one dialogue with the regulators about those regs. Then what we did was we started a pilot and we said, "okay, let's bank this first company."It happened to be Second Market and they were looking for a bank to help them, as they were helping their customers. So they had a broker dealer. So one of the important things for us, was that they understood regulation themselves, because they were providing services to their customers buying and selling Bitcoin.

What we did in the early days, it's gotten a lot more sophisticated now, but whenever they would do a transaction for one of their customers and they wanted to wire money through Silvergate, we asked them for the public address on the Blockchain and then we would go, and we would look and they were blown away, but our team, we'd go to Block Explorer.

We would type in the address and what we would want to see, is a transaction on the Blockchain, that was representative of the dollars that were going through the bank. I don't think any other banks at that time were asking that question.

Peter McCormack: Was that a requirement or was that your own?

Alan Lane: That was our own, that was how we got comfortable, because we knew that they had to follow Know Your Customer and so we knew they knew who their customer was. We wanted to know, can we validate that the amount of money that's going through the bank, is tied to a specific transaction on the Blockchain? It's much more understandable now, but folks don't understand that that's really not anonymous, you can track it.

That was one of the things that we explained to the regulators early on, which is, this is actually, and I know law enforcement does this as well. They'll say, "yeah, we would much rather folks use Bitcoin as opposed to cash" and so we were kind of an early believer of that possibility.

Peter McCormack: Well, I think that's what some people want to explain to Trump and Mnuchin, that this isn't really an ideal tool for criminals! Okay, so you've got that first client and I guess you're thinking, "okay, we can do this. This is a sector we can look after." 2013 was an interesting year, but then we had Mt. Gox and you will probably remember that time.

Alan Lane: That's right, yes.

Peter McCormack: So we go into what is essentially the previous bear market to this one. How much growth had you seen in crypto before Mt Gox happened?

Alan Lane: So not much before Mt. Gox, because Mt. Gox was early 2014, I think, if I'm remembering correctly. So we were literally just getting started when Mt Gox happened. To me, that kind of validated why there was a need for more professional, whether that be banks or exchanges etc and so that didn't scare me away. I mean, we certainly looked to say, "okay, who's the bank and are they in the crosshairs etc."

Peter McCormack: I mean because in the early days, I don't know if you know, but Jed was managing it all out of his personal Chase account. He was moving money in and out of his personal Chase account and I know Mark Karpeles had a whole bunch of problems getting banking services.

Alan Lane: Not on those specific details, but it was generally known that these companies were opening account after account of different banks, just essentially trying to stay ahead of getting closed out. So in the early days for our initiative, that was our competitive advantage, which was I think we may be, certainly at that time, the only bank that intentionally decided to bank cryptocurrency companies.

We know of other banks who maybe had companies they were banking, that they might've thought they were tech companies or what have you and then one day they discovered "oh, this is a Bitcoin company." We went in from day one, saying "we're going to build a program that is going to satisfy regulatory compliance to provide banking services to this industry."

Peter McCormack: And you were fully comfortable with this. So why is it other banks weren't? What is the root fear? What's the risks?

Alan Lane: Sure, so I wouldn't want to overstate my comfort early on. So it was an exploration and we felt like we understood the rules as they were going to be applied and those rules are really around banking Money Service Businesses, MSBs as they're called in the States, check cashers, anybody that is providing banking services, that's not a bank. That's most of the cryptocurrency exchange platforms, which are considered Money Service Businesses etc.

Peter McCormack: It's based if you are ever, at any point, holding funds, that belongs to somebody else and it's to ensure that you don't lose those funds.

Alan Lane: Well, it's really more about making sure you know whose funds those are. It's really more about the KYC/AML.

Peter McCormack: I heard a new one today, that I hadn't had before, CFC safeguards?

Alan Lane: It might've been CFT I think, which is countering the funding of terrorism.

Peter McCormack: Ah sorry yes, CFT funding. Yeah so that was the third one, I hadn't heard about.

Alan Lane: So those are often, in regulatory circles, they're used together, AML/CFT and I watched Secretary Mnuchin's press conference yesterday as well.

Peter McCormack: It's in my agenda! Okay, but what is the risk to you as a bank? Where something goes wrong for you, what are the penalties?

Alan Lane: So the biggest risk is that AML risk. So the broad regulation, it's the BSA, the Bank Secrecy Act. AML, KYC, it's all different ways of kind of saying the same thing, which is making sure that you know who your customers are and making sure that you're not in any way providing funding, financing etc for illicit activity and the AML specifically about you're not funding terrorism.

Peter McCormack: And the penalties are fines? Or worse?

Alan Lane: The penalties are fines and they can be really severe. You can essentially put the entire bank at jeopardy. So I mentioned earlier the timing...

Peter McCormack: But the spectrum I'm guessing is from, like an unknowing mistake that you've tried to do everything correct, you've tried to track everything, find out the identities, something slipped through to willful neglect and I guess the penalties will reflect that?

Alan Lane: So yeah, I certainly think the penalties would be different on that spectrum. But you don't want to make a mistake, even if it's an innocent mistake. So that causes you to build in safeguards and processes etc. Over the last almost six years now, we've spent a lot of time and money working with regulators as well, to build the safeguards to make sure that we don't make that mistake.

Peter McCormack: And you have a direct relationship, you talk to them?

Alan Lane: The regulators? So no different than any other bank in the country. We are subject to annual safety and soundness exams. We're subject to regulatory compliance exams and typically for smaller banks like ours, regulators will come in once a year. When you're conducting activities that are considered high risk activities, you might see them more frequently.

So it's not uncommon for us to not only have our annual exam, but to have a periodic visit that would be much more targeted just to the high risk activity. So yes, we have an ongoing dialogue with the regulators. The one thing we never want to do is surprise them. This goes way back, even before the cryptocurrency initiative, we've always had an open dialogue anytime we start a new initiative. Once we get our hands around what we're going to do, we invite the regulators in and have a conversation with them.

Peter McCormack: So one of the interesting things is that Caitlin Long would say that the amount of regulation, the reach of KYC AML, CFT regulations is way far disproportionate to how many people have been prosecuted and caught funding terrorism and committing crimes, with say even cryptocurrencies. But one of the things I would say, is that because there's so much regulation? Has the regulation been a deterrent or do you have a belief that, similar to Caitlin's?

Alan Lane: Yeah that's a really interesting question. I know Caitlin, we've had several conversations and in fact, I just read her written testimony, I don't know if you've seen that yet.

Peter McCormack: Yeah I have.

Alan Lane: I think the statistic was 0.002% or something like that. So I honestly don't have a good sense to be able to answer your question, as to how much of that low level is really because of the deterrent. I just come from the perspective of, we're a regulated financial institution and those are the rules. As my wife likes to say, I used to play a lot of board games and things when I was growing up and one thing, I always read the rules!

Peter McCormack: I always broke the rules! So moving on, following Mt. Gox, obviously the market starts to pick up again in 2015. I guess your business is changing shape during that period of time? When does it really start to take off in terms of cryptocurrencies for you? When do you really start to notice, "okay, we're onto something here."

Alan Lane: So just to fill in that gap, so 2014, 2015 we probably at one point maybe had 20 to 30 clients deposit levels would have fluctuated around maybe $20 million to $50 million. Not a big initiative, on a roughly at the time, maybe $600 million to $800 million bank. But we were learning! We were banking quite a cross section of the ecosystem, always focusing on those that were essentially Money Service Businesses that were willing to comply with the rules and the regs.

So that looked like exchange platforms, miners, payment processors. So we learned a lot and we met a lot of folks. We met a lot of the crypto OGs during those years. Toward the end of 2015, it felt like this could be something more and I realized that our competitive advantage, which had just been, "hey, we're a bank open to this and we have a regulatory compliant offering", that if this really got big and other banks started coming in, that wasn't going to be a sustainable competitive advantage.

So as we were looking to, "what do we do next", we really looked at the cross section of our customers. We were very blessed at that time in early 2016 to meet Ben Reynolds. I introduced you to Ben earlier. Ben joined the team, didn't know anything about Bitcoin or crypto when he joined! But he's just got this inquisitive mind and he just started going out and meeting with our customers. What he discovered was that a lot of our customers had some of the same pain points around banking friction and lack of liquidity, counterparty risk, things that are pretty commonly solved in other financial markets and the crypto market was just so new and nascent, that those were kind of common pain points.

So we set about trying to figure out if we could solve those. So that was in 2016 and as we did that, we really kind of settled in on where we were going to focus, which was providing banking services to cryptocurrency exchanges, over the counter traders, the OTC desks, proprietary traders, institutional investors and really folks that were looking at crypto as a new asset class. So that then allowed us to kind of start focusing on building a platform, to provide services to solve problems for that group of the ecosystem.

Peter McCormack: So let's walk through some of the problems you've solved then. So you've got obviously a number of different services. I've been through your website. You are very proud and talk about the API a lot. So what does the API do? How does it help these companies?

Alan Lane: So the thing that we're probably most known for in this ecosystem is called the SEN, which is the Silvergate Exchange Network. Really what that allows us to do, it allows our customers to transact in US dollars between themselves 24 hours a day, 7 days a week, 365 days a year. It's not a Blockchain. I know there are other competing offers out there where folks are trying to use the Blockchain for this. I don't think you need a Blockchain to move US dollars.

Peter McCormack: You've just killed the use of Blockchain for many, many companies! People are going to love this.

Alan Lane: Well, at the end of the day, and we'll get to the API in a minute, but what we're trying to do, is we're trying to remove as much friction as possible for moving US dollars. Now that is something that in other financial markets, credit exists, so folks have gotten comfortable with the counterparty risk and unless you have some big catastrophe like what happened in 2008, most of the time everything works. Crypto is brand new and so what we've been working on, is trying to remove all the friction.

So earlier this year we announced that we're putting in a new payment hub, which will be automated and API enabled wires and ACH and things. So we're constantly reinvesting and really trying to build products and services that will help our customers. Back to the SEN, what we were hearing from our customers was, and we were actually seeing this, an institutional investor who had an account at Silvergate, they wanted to buy Bitcoin on one of the exchanges that was also a customer of Silvergate. They would literally have to wire money from us to us in a sense and it just didn't make any sense.

So back to the counterparty risk, we know both parties, we've KYC'ed them, they know each other. The banking friction was just that payment system. So we thought, "well gosh, we should be able to enable them to move money between themselves". The beautiful thing about this, and I had been buying Bitcoin along the way and so I had firsthand experience about opening an account and then funding it with ACH and all that stuff.

I think we're probably the first bank in the world, to bring the traditional banking system that's open 40 hours a week, Monday through Friday, and bring it into the 24/7 crypto world, because if you own Bitcoin and you have an account at Silvergate and you have an account at an exchange that is also banking at Silvergate, you can wake up in the middle of the night on Saturday and look and see, there's something going on over in Asia in the crypto markets. 

You can log into your account at Silvergate, you can push money over to the exchange, you can be logged into the exchange, you can see it hit, it's almost instantaneous. Then you can immediately start trading on the weekends. In a similar fashion, if there's something going on and the price is plummeting and you're long, so you're going to sell your Bitcoin on some exchange and you don't want it sitting there, you can sell it and then you can pull it back into your account at Silvergate on a Sunday morning.

So that was the "a-ha" moment and then when we took the idea to one of our largest clients, who is an exchange, they said, "yeah, we love that idea, but if you're going to do that, we need you to build an API because this really needs to be scalable. We have millions of customers and we don't want to have someone sitting there with their online banking terminal saying, "oh, Peter just sent me $1 million and now I need to put it in their account.""

So we built the API! I think we're one of probably only, there's maybe a couple dozen banks in the country, that have actual transactional API. Most folks these days are using APIs for something, but a lot of APIs are more informational and not transactional. So that's the distinction that we would make.

Peter McCormack: One of the things I still have never got my head around, is what is the real movement of money. For example, if I was an institutional account holder with yourself and I wanted to move some money to the exchange, the money appears instantly in the exchange, but realistically I'm trying understand what happens in the background. Are you just moving numbers in a database?

Alan Lane: So you're very familiar with the concept of ledgers, knowing about Bitcoin and it is essentially a ledger entry on our accounting system, where we're keeping track of your funds and we're keeping track of the funds that are at the exchange.

Now the exchange is keeping their own record, because they have millions of customers and so they know that you sent them X amount and I sent them X amount, so it's up to them to keep track of all of that. What we're keeping track of is the total and then we're keeping track of how much did we send from Peter to that exchange or vice versa, how much came from that exchange and went back into Peter's account.

Peter McCormack: So this is where it gets to the real questions of the bits I don't understand about banking. Say I bank with another bank, say Chase and I transferred over a $100,000 to somebody has an account with Silvergate. How do the banks settle with each other? Is it daily? Is it weekly? Are you sending trucks around full of money? I don't understand how all this works!

Alan Lane: So it's essentially, you've probably heard the term net settlement? So all the banks are sending money and receiving money all day long and all of that is going through their account at the Fed. So it's really keeping track of... So the Fed has their own ledger and they know how much Silvergate sent out, how much Silvergate received and so then there's essentially that netting and it pretty much happens in real time.

They're keeping track. There are things called daylight overdrafts, if you overdraw your account at the Fed, because you send more out during the day than what you receive, that's a big no-no. So there's a lot of liquidity management that comes to play here as well.

Peter McCormack: So the Fed has the master ledger. Each bank has their own ledger and the exchanges have a ledger. That's really interesting. So most of the banking system is just the movement of numbers in ledgers, less so actual, it's not like we're carrying around big bags of cash anymore. So eventually we'll end up with a cashless society potentially and it will just be numbers.

Alan Lane: That's right.

Peter McCormack: A bit like Bitcoin or Libra! So what are the main challenges that you face banking crypto companies as compared to say a traditional company? What are the real challenges that you face?

Alan Lane: So it really does come back to regulatory. The biggest challenge, if you will, I've said this a lot, this is not for the faint of heart because there is a lot of risk. The risk is real. All you need to do is watch a press conference, by the Secretary of the Treasury, to know that they're taking this seriously. I actually took some comfort in watching his press conference, because what he was basically saying is, if you're going to be doing this, you better be doing it right.

So we certainly believe that we're doing it right, we've been engaged with our regulators from the very beginning. So that's really the biggest challenge if you will, is just constantly being vigilant in making sure... I mean, you're not going to get your account open here in 24 hours if you're a cryptocurrency company. But what you can have is confidence that if you get an account at Silvergate, then we've gone through the process of vetting you.

We joke that we're kind of like the good housekeeping seal of approval. If you've gone through the rigor of satisfying our KYC, our diligence process, we're intentional about it and you can have confidence that you have an account at Silvergate

Peter McCormack: And more than that, you have access to specific services that you provide, which other banks might not have, you're innovating beyond other companies.

Alan Lane: So back to the API, the cash management services, the ability for our customers to move money onto and off of exchange platforms is huge, but we're not stopping there. So one of the things, and we're not ready to announce a new product yet, but there's a lack of credit in this ecosystem. Since we are focused on the institutional market, those customers in other financial markets are used to credit. They're used to just having access to credit.

They don't necessarily have to pre-fund. As you know, the only way you're going to buy Bitcoin, is you're going to send your dollars first and then you're going to get the Bitcoin back. You don't really have to do that in other markets and it's because credit exists. So we're looking at, since we are a regulated financial institution that provides credit in other niches and we have a pretty good understanding of Bitcoin and other cryptocurrencies because we've been doing this for six years, we think that there's an opportunity to provide credit.

So we're innovating ourselves in terms of thinking ahead to what other services and we've got a great group of customers who, we have an ongoing dialogue with and who share with us what their pain points are and what their needs are. Then actually we collaborate with them to try to solve their problems.

Peter McCormack: Yeah, I guess as you're speaking to these clients when the same problem comes up again and again and again, this is an option for you. What about custody? Because I know you don't provide it yet, but it's not a closed door either?

Alan Lane: It's not a closed door and in fact, if you go back to the crypto bull market at the end of 2017, one of the big mantras back at that time, was the lack of qualified custodians was really kind of holding back the institutional market. That was the belief. So we thought, "well, let's look at that", but recognizing, and actually, I appreciate the segue, because it's a great segue from just talking about credit. 

We wouldn't necessarily be interested in providing custody just for the sake of providing custody. In other markets, custody is not something that a company can typically make money at. In crypto, because it's new, there was this belief that, "gosh, here's a service that usually doesn't cost anything." Financial institutions will provide custody in other markets, just to get the rest of the business, so it's a loss leader. But in crypto you could actually get paid for it, because there were not a lot of qualified custodians.

So we actually started going down that path, looking at whether or not it made sense for us to provide custody, but always with the end game in mind, which is if we're going to provide credit, we have to feel comfortable that we can essentially grab that asset if we need it. The whole point of extending credit, is if someone doesn't pay you back, well how do you get paid back? The way you get paid back, is well I've got custody of the Bitcoin.

So we're certainly looking at custody. One of the potential risks though, is that that's an awful big honeypot! So there are technology solutions that are being worked on out there that we're looking at, where essentially the customer can retain custody, but you put in a smart contract where for a period of time, like while you're extending credit, they've relinquish their rights to it and you've got the rights for a period of time. So there are other things that are out there that we're looking at.

Peter McCormack: It's a funny new world, isn't it?

Alan Lane: It is, it's a lot of fun!

Peter McCormack: So let me tell you what I want from a bank and it's the same whether it's my current business or if it's my personal account. Actually it's even more relevant to my business. I'll tell you why. So I have a podcast, I have advertisers, it's not a small amount of money I'm dealing with, it's not a huge amount of money. I have customers in the US, I have customers in the UK, it's mainly the US, but I can potentially have a customer anywhere in the world, who can pay me in any currency and who can also want to pay me in Bitcoin.

If I get paid in dollars, sometimes I get a wire transfer and I pay a significant fee on that. Sometimes I'll ask them to pay by PayPal, so I don't pay the fee from the bank, because I pay a extra something like 3.2% above exchange rate. If someone's spending $10,000, it's not a small amount of money, it's another $320 just gone like that. Some people want to pay me in Bitcoin and what I used to do, I used to always get the Bitcoin, sell it immediately into my local currency and transfer it back, because I run my business in pounds and dollars.

Now I do about 20% I leave in Bitcoin actually, interestingly. What I really want Alan, is I want a bank account, which has my pounds and my Bitcoin. If somebody pays me, it comes into my pounds account, if they pay me Bitcoin, it comes into my Bitcoin and I can easily move my Bitcoin and dollar bank accounts between each other. That's the future I want. How far are we away from that?

Alan Lane: Well in a certain sense, I can honestly say we're closer than we've ever been. But having said that, we could still be far away from that. You were asking earlier about custody, one of the things that we looked at a couple of years ago was whether we could even have Bitcoin on our balance sheet. So it's one thing to hold it on behalf of somebody else, but would Bitcoin be a permissible investment by the bank? So right now our investments, we can buy US treasury bonds, we can buy other types of bonds, we can make loans, those are all assets, those are all investments, right?

We looked at, "well, could we actually invest in Bitcoin?" Now it wasn't because we were interested in speculating on the price of Bitcoin or anything like that, but it was really more from the standpoint of, if we really want to understand our customers and what they go through, then we should put a little Bitcoin on our balance sheet and try to do things with it the way our customers do. What we discovered, and we didn't actually go ask the regulators this, I mentioned earlier, we open the regs and we look ourselves.

We came to the conclusion that it's not a permissible investment for a California state charter commercial bank to invest in Bitcoin and to have Bitcoin on our balance sheet. Not that we can't provide custody for it, that would be different because that would be holding it on behalf of somebody else, which we can do, just like we can have a safe deposit box and we can have stuff in there that we might not be able to invest in. So can we provide a banking service to you, Peter, where you can have your Bitcoin and your dollars or pounds all in the same account?

The only way to do that right now is actually, if we were to do something like what I was just talking about, where we would have to have a trust company or a broker dealer or some other entity and then you could create a relationship, where we could show you, “hey Peter, here's your US dollar balance. Here's your pounds, here's your Bitcoin." But they wouldn't actually all be in the same account.

Peter McCormack: But it doesn't really need to be, it's a visual representation.

Alan Lane: You're right. So in that sense it's possible now, but you have to find the bank that also provides that custodial service.

Peter McCormack: So it's not a technology problem?

Alan Lane: No, it's not a technology problem at all.

Peter McCormack: Okay, interesting. I see that future coming, I know other banks are looking at it. I think Revolut in the UK might do it, but I'm not sure whether you can withdraw the Bitcoin. Okay, so obviously the big thing at the moment now also, is regulations.

We've had David Marcus' Senate testimony hearing for Libra, and we've also had Mnuchin coming out and doing his press call. It feels to me like more regulation is coming. That's what it feels like to me. Do you think there's a right level of regulation? When you look at the regulations, do you think they're fair? Do you think they're right? Do you see a need for more or do you think actually we should be loosening the grip here?

Alan Lane: Yeah, that's a very fair question. I don't know how to answer it! From the standpoint of, it certainly feels like... So I've been in banking for almost 40 years and there are a lot more regulations today than existed when I got into banking, back in the early 80s. So from that sense...

Peter McCormack: To the improvement of the industry?

Alan Lane: I wouldn't necessarily say that, no. So every regulation that is adopted, has a particular goal in mind and I think by and large those goals are good. You've got all kinds of consumer privacy, you've got the anti-terrorism, all of those goals in and of themselves are good, but oftentimes the way they're layered on and then the way they're enforced and the way they're understood, it becomes quite a burden.

The regulators are often looking at ways to relieve the burden, but their hands are tied, because the regulations come from the laws. So you really have to back up. I applaud what Caitlin Long is doing in Wyoming for instance, because it starts with going to your congressional body, in that case, the state of Wyoming and getting specific laws passed, that you can then build regulations on, on those laws.

So we've got a whole bunch of regulations that are based on laws that are going to need to be re-opened and re-addressed, if you're going to be able to change the regulation.

Peter McCormack: Are there any conflicting state and federal regulations here at all? So the reason I ask is last week I visited Boulder and I visited a cannabis dispensary, legal in the state of Boulder, but illegal federally. Does any of that exist within the crypto world?

Alan Lane: I don't believe so. I'm very familiar with that. Cannabis is legal in the state of California.

Peter McCormack: It's a niche!

Alan Lane: It's a niche, but it's still illegal at the federal level. I listened to that podcast and I've had the opportunity to meet Jack.

Peter McCormack: He's a great guy! Have you met Bitcoin Mom?

Alan Lane: I have not.

Peter McCormack: She is fantastic!

Alan Lane: Yeah, it sounded like it, I really enjoyed the podcast. So I'm familiar with that and in fact, many folks... Well, I'll say it this way, in 2014 when we invited the regulators in to talk with him about Bitcoin, at that time we had maybe a half a dozen customers and it was really more of an educational thing. We asked if they had heard of Bitcoin and the answer was, "well, yeah, isn't that like banking marijuana companies?”

So that was 2014, so we've come a long way there and my response back at that time, was there's one major difference and at the time it was true in California as well, Bitcoin is legal and marijuana is illegal. So now a lot of states have legalized it and you're right, it might be a niche. It feels to me like there's so much opportunity in the crypto initiative.

There are a lot of banks that it feels like are just chomping at the bit to provide banking services to cannabis companies. They're waiting for the loosening at the federal level. I actually look at that as when they come in, let them focus on that and we'll just keep building the services that we're providing to cryptocurrency companies.

Peter McCormack: And you are fully sold on cryptocurrencies, not as just as an opportunity for the bank, but you have to believe in it as well. You have to believe in a future of crypto, certainly in terms of Bitcoin. What could the regulators do, do you believe, to make the industry improve and to help say a company like yourself?

Alan Lane: So I think a lot of progress has actually been made. If you look at what some of the SEC, the CFTC, some of our clients are companies that are regulated by those entities and it's pretty clear now that Bitcoin is not a security. A lot of the other tokens might be and so there's going to be a little bit of a cleansing, I think that's going to happen.

But as far as Bitcoin and probably Ethereum, I mean I think those are here for good. Definitely different use cases. I don't own any Ethereum, I've never bought it. I bought Bitcoin and I believe the thesis of Bitcoin as sound money and Ethereum is an application for smart contracts. But I think you can do smart contracts on Bitcoin as well, so we'll see what happens down the road.

Peter McCormack: I just want to ask you about Libra.

Alan Lane: Sure!

Peter McCormack: What is your general view? What do you make of it? What are your views on how the regulators have reacted and what do you believe that its role is in this?

Alan Lane: So as soon as they put the white paper up on their website, I was reading it. We were all there. I literally don't remember what else was going on that day. Anything non-technical, that was all the different descriptions of the Libra association and all of that, that they published, I was all over it.

I was reading it, I was trying to understand it. I've read a lot on Twitter and read a lot of articles of folks saying, "well, it's positive in general for the cryptocurrency ecosystem, because it's bringing a lot of attention to it" and then there's the folks who say "it's not even a cryptocurrency", so I've read all of that stuff.

I'm actually not sure whether it's good for Bitcoin or not. I'm not convinced that it's good for Bitcoin, I don't know yet that it's bad. I'm still kind of watching. When stablecoins first came out a couple of years ago, I watched with interest as Tether launched. Tether was small initially and it solved a problem for folks. Then in 2017, during the ICO craze, tether just ballooned up and now they've had their own challenges, but you saw other companies coming out and issuing regulated US dollar backed stablecoins.

For the most part, I think they've kind of struggled to get traction, but it's because in my opinion on this, is that the stablecoin market is still pretty much an institutional market. It's really more geared toward those folks who are investors and maybe they're trying to trade on an exchange, where they can't transfer dollars to or what have you.

Then Libra is coming at it from a completely different perspective, that is not institutional, it is banking the unbanked. You started this conversation with that, but they're really talking about the consumer version. On the one hand, we're not a consumer bank. We provide banking services to cryptocurrency exchange platforms who may have consumer customers, but we don't deal directly with the consumer.

So when I think about Bitcoin and the use case for Bitcoin as sound money and then I think about Libra, honestly, it's certainly not a coincidence if you look at who the members are of the initial association, you've got quite an impressive group there. You've got the PayPals of the world and some of the credit card companies, so everybody's got their stake in it. You don't see any banks there yet and I'm not sure what point you might see banks there, but someone's going to have to hold the currencies that are essentially backing the Libra.

Peter McCormack: Silvergate might? Did you have a think about it? Can you even answer that?

Alan Lane: So the way we approach all of these things is we look at the opportunity for Silvergate. Are we solving a problem for our customer that also is an opportunity for us?

It does not yet feel like we'd be solving a problem for Libra. If that thing takes off, it's going to be huge. What I will say, is that if you look at the cryptocurrency companies that are part of that initial grouping, we have relationships with those folks. So to the extent they need banking services, we're happy to provide them.

Peter McCormack: But to be on that map of a hundred companies would put you on the world stage!

Alan Lane: Yeah, we're not yet having any of those kinds of conversations.

Peter McCormack: So I've had a changing view of it. I kind of waiver sometimes I'm like, "oh, this is awful", sometimes I think this could be great. I've kind of come to the conclusion that it just is what it is. What's the alternative? Bitcoin is an alternative to Libra, I don't think cause it's a different purpose. Like you said, it's sound money, Libra's just a way of buying things online, moving money around the world.

But if it does give people the ability to move money around the world cheaper, it's not a bad thing. I'm not anti using it. Would I use it? Maybe I'll keep $100 in there, $50, $200, whatever. Maybe I would use it to book my Uber, if the user experience is better, but after hearing David Marcus' testimony, they are going to be under so much scrutiny because of everything that's happened with Cambridge Analytica and with the Russian bots, they really can't screw this up. So I don't know. I'm kind of okay with it.

Alan Lane: Yeah, when I say I'm not sure whether it's good or bad, what I'm concerned about is, does the entire industry potentially get under this huge microscope unduly because of this negative political backlash against Facebook. So from that perspective, it could be negative for the industry.

Peter McCormack: Well it almost certainly has raised... I don't think Trump would have been tweeting about Bitcoin, if Libra hadn't existed. I don't think Mnuchin would have been doing a press conference yesterday and referencing Bitcoin if Libra hadn't come out. That's a fair point.

But also, the interesting thing is, because it's been out for a long time, Bitcoin is who they keep referring to as being used for ransomware or for terrorists or whatever, but they haven't been able to bring anybody in front of the Senate testimony hearing for questioning. But they've been able to do that for Libra and that's the clear difference for me.

Alan Lane: That's right!

Peter McCormack: So I put out a tweet today, for me, this is just another chapter. We've had Mt. Gox we've had SegWit2X, we've had Bitcoin Cash, we've had all these different things, which could have been a crisis or were a crisis for Bitcoin, but it survived. I just kind of see this as another one.

Alan Lane: Yeah, I think that's right.

Peter McCormack: So this has been great, really enjoyed this! So thank you for having me here and I'm looking forward to seeing what we're going to eat shortly. So what's coming up for Silvergate? What are the most important things coming up for you guys? What's going to be happening here? Also you can finish by telling people how they can find out more about Silvergate, I mean they're going to hear about it here, but if somebody wanted to be a customer to Silvergate, how do they apply?

Alan Lane: So on that last question, the best thing to do is go to silvergate.com. It's very easy to start the process of opening an account, it's online. We've done a lot here recently over the last few months to make it much easier for our prospective customers, to go right to the website, start the account opening process and we'll get them through as quickly as we can. In terms of what's on the horizon, we touched on it a little bit, , we talked about the possibility of credit.

One of the other things you were asking earlier about, the ability to transact in dollars, pounds and Bitcoin for instance. One of the things, probably about half of our customers are actually non-US entities and so we have a lot of customers, they're either offshore where they're technically US, but they might be in the Cayman Islands if they're an institutional investor.

But then we also have exchanges over in Europe, we have institutional investors over the counter traders etc, over in Singapore, Japan, Hong Kong, and so enabling foreign currency exchange and things that Silvergate historically didn't have to provide, we didn't need those services, but as our customers ask for them... Anything we do, we want to do well and we want to make sure that it's scalable, because we believe we're at the very beginning of something that is transformational for finance.

So we are working on essentially, as I mentioned earlier, removing all friction, eventually for any fiat currency to get in and out of Bitcoin. So you can think about that as Fed wires Swift. Early on I was looking at, are there some cryptocurrency ways that we could solve the "Swift problem"? I think the real answer is use the existing channels and make it as efficient as possible, until those channels get more efficient and then just be on the cutting edge of that.

Peter McCormack: Yeah, I do wonder why Swift haven't really... Well, they haven't had a need to I guess, have they? They've now got a bit of pressure from Ripple, but I'm not too sure about that.

Alan Lane: Yeah, so I think there's good stuff going on there. We've had the opportunity to meet with a lot of folks that have been instrumental over the years in the FX markets, in the central counterparty clearing service. So the bottom line is there's a lot of infrastructure out there, that we just need to plug into and we can make things a lot more efficient and along the way we'll be enabling Bitcoin.

Peter McCormack: Okay, great! If people want to get ahold of you, is there anyone specifically who you would want to come direct to you or do you want them to come through official channels?

Alan Lane: So I'm pretty easy to find. I mean I'm on the website. Silvergate.com is the easiest way. Folks, if they go there, they can pretty easily get ahold of me.

Peter McCormack: Alright, great. Look, thanks for having me on Alan, thanks for having me here in San Diego.

Alan Lane: Peter it's been great, love to have you, thank you!

Peter McCormack: Thank you!

PodcastPeter McCormack1 Comment