Silvergate CEO Alan Lane On the Business of Stablecoin

soul searching, I think so searching is a fine word. Well, a vast amount of criticism of the stable coin space, and we saw some other stable coins, notably Tether start to cobble a bit, although it looks like it's gotten back closer to its PEG since all of this happened, but lots of people asking tough questions about the space. Are stable coins sustainable? Are they inherently susceptible to some

sort of bank run like phenomenon? And then secondly, is this whole terror Luna collapse going to expose the sector to more regulation? Is there going to be even more attention trained on this, yeah, right, because if there are different models of stable coins, so this is really important. So there are stable coins where a issuer has a dollars equivalent of assets in a regulated bank. There are stable coins in which the issuer has in theory a dollar or more than a dollar's worth of crypto assets

held up in some smart contract. And then there are these so called algorithmic stable coins in which I don't know through magic, they they don't really seem to work, but they keep trying. Whether it's like somehow the price is supposed to just stay there even without the money, but what if The point is, if you sell something that is nominally supposed to be worth a dollar and it doesn't stay at a dollar, then regulators are going

to get interested. And of course we saw in the financial crisis that one of this sort of loci a source of instability, yeah, was money market mutual funds, which we're supposed to stay at a dollar and didn't the

reserve the reserve funds. And so any time you have something that's supposed to hold a dollar or supposed to be stable and is not, this is a major source of regulatory interest, regardless of what the model is that's right, and regulators are well aware that when you have something that's supposed to be worth a dollar, if it dips below a dollar, like reserve primary did back in two thousand eight, it can actually have massive consequences for the

rest of the financial system. You get a contagion effect. And I think this is partially why they're worried about the space. But the other thing I would say is this is why when people say, oh, Tera Luna, you should have known better. This was a terrible, you know, volatile asset, It's like, well, the marketing actually matters here. If you say this thing is always going to be worth a dollar. Yes, obviously people can do due diligence

and decide for themselves whether or not that's true. But you're putting it forth as a stable, one dollar pegged asset, and that comes with some sort of responsibility that regulators

might well want to enforce. Absolutely. Like that to me is the key thing, Like, Okay, yes, at some level, right, people can learn about the smart contract risk, and they can learn about you know, what theoretically isn't isn't back into coin, but call something a stable coinet falls that seems like a problem, so we need to learn more about the space. And the other question I have like

why is it growing? I thought the whole point of crypto was to make a lot of money and have the number go up, So why the attraction to a coin that doesn't go up? Is another well? Also also to get away from fiat dollars, right, and instead of away from it, it seems like we've just created the shadow banking system, almost like the euro dollar market, just to create more dollars that are pegged to dollars. Anyway,

I have so many questions. Let's let's get attitude. So I'm really excited about our guest because he has a great position within this world to understand the sort of intersection of crypto and traditional banking, which is kind of what a stable coin is. It is this attempt to sort of like bridge. Okay, you have the US dollar and you have crypto, and you sort of make a crypto version of the US dollar. We're gonna be talking to someone who is a great viewpoint on that. We're

gonna be speaking with Allen Lane. He's the CEO of silver Gate Bank, which is a bank that has kind of become the bank that banks crypto. It's been banking and working with crypto companies since it is active in the sort of like plumbing the backside of the stable coin space. So we're gonna get all into the business of stable coins. So, Ellen, thank you so much for joining us. Yeah, thank you for the opportunity. It's it's

great to be here with with both of you. Ellen, why do people why are people so excited about stable coins? I thought the whole point of cryptocurrency was like a number shooting up to the moon. What's so exciting about a coin that just stays flat at the U. S dollar? Yeah, yeah, you're you're you're referencing the number go up, right, you know, I mean point of a coin that doesn't go up. Yeah, well, um, you know. As a regulated financial institution UM Silvergate is

a California State chartered bank. We are a member of the Federal Reserve. Our deposits are insured by the fdi C and so we're very interested in the stability of the US dollar and and making sure that anytime any of our customers show up, they you know, that they can get their dollars back out and and so you're

absolutely right. I heard in your introductory comments that we've been banking this ecosystem since in your ray of two thousand fourteen, which is an important data point because back then it was bitcoin only, and so we entered the space really focused on this this new digital asset called bitcoin, and some of the companies that were being formed at the time to provide services to this budding bitcoin space, and many of them were struggling to find and maintain

bank accounts, and so that was really where we started. We've obviously evolved quite a bit over the last eight years, and and happy to talk a little bit about that, but I don't want to derail the state the stable coin conversation. Well, I mean, I'll take you up on both those topics. So, you know, a regulated bank interested in the stability of the US dollar and presumably you know,

relatively interested in kind of boring investments. You got into crypto in when stable coins didn't really exist, and you've since evolved old from becoming just a bank for crypto related businesses to one that is more intricately involved in the stable coin business. Can you explain that transition to us and what exactly is is the opportunity there for you when it comes to stable coins. Let's go back briefly to to our entrance into the space, and it

was really preceded by intellectual cure curiosity on my behalf. Personally, I was looking at bitcoin in two thousand thirteen and this meme was with bitcoin you could be your own bank, and you know, being a career banker, I thought that was interesting. And so as I went down the bitcoin rabbit hole, as they as they say, back in two thousand thirteen, I was really intrigued by this concept of

the fact that bitcoin had a fixed supply. And you know, we're talking a little bit here about the stability of the US dollar UM, and we know that the FEDS mandate is to try to to try to maintain inflation around two percent. You know, there's obviously we're quite a

bit above that right now. But even with just that mandate, the fact that inflation at a target rate of two percent means that by definition, even though I mentioned at the outset that we're interested in the stability of the US dollar, the fact is the US dollar is destined to go down and value um if the FED hits their target by two percent a year UM. And so I fell down the bitcoin rabbit hole. Um, I was intrigued by it. I didn't buy as much as I

should have. And that's probably the pointers there you go. That's that's probably every bitcoiners, um you know thought, no matter when you get in. But the fact of the matter is at once we got into the ecosystem and we were trying to help our customers. So the first thing we did, Tracy, is is we were just a bank willing to talk to these these new companies. And I should mention right up front. Silver Gate is institutionally focused,

so we do not bank consumers directly. Uh So this is an important distinction because many of our customers provide services to consumers, but we are an institutionally focused bank. And so we were opening bank accounts for businesses who were providing services to the bitcoin ecosystem. And what did that look like back in two thousand fourteen, Well, it looked like Genesis, which at the time was still called second Market. Um. They were enabling some of their customers

to um, you know, to buy and sell bitcoin. And we went deep on this early so um you know, because we needed to satisfy ourselves in our regulators that we knew what was the use of proceeds. You know, what was this money being used for. These businesses are deemed to be money service businesses. And so what we would do is when when Genesis then called Second Market, would actually UM try to transact on behalf of a customer.

So one of their customers wanted to buy our self bitcoin and that meant that they were sending a wire transfer across our platform. We asked at the time, okay, give us the bitcoin address you know for this transaction. And what we wanted to see on the blockchain was if someone was sent in a hundred thousand dollars to buy ourselves bitcoin. We wanted to go out to the blockchain and see that there was in fact a transaction

that represented a hundred thousand dollars of value. And I think at the time Second Market was was somewhat amazed that this this bank in southern California was actually asking, you know, for blockchain addresses, UM and I think we have a pretty deep understanding of of this ecosystem. To now get to the point of the story around stable Coin, you first have to understand what is silver Gate known

for today, and that is a platform. It's a global payments platform that is referred to as the SIN, which is an acronym S E N. It stands for the

silver Gate Exchange Network. And what that is is it is a two sided network where we connect digital asset exchange platforms such as coin base and Gemini and crack in and f t X. And as soon as I start naming, I'm I'm worried, I'm gonna let leave somebody out, We've We've got all of them, all of the major ones, anybody that is serious about regulation, and that's an important distinction because they have to satisfy not only their own legal and regulatory requirements, but then we have to verify

that that that their compliance programs are sound. So that's one side of the network, um. And then on the other side of the network is institutional investors other folks who are providing access to to bitcoin and other digital assets, and we connect them across our platforms so that they can interact twenty four hours a day, seven days a week.

It is only fiat currency, though, and that's that's another important distinction, especially as we moved to the stable coin topic, because our customers are dealing with US dollars and and now euros. We we launched the euro sand platform back in February so that we can provide this service over in Europe as well. But it is a seven A p I enabled connection, so that our customers can move US dollars amongst themselves around the ecosystem any time or

the day of the day or night. We launched this back in two thousand seventeen, and it was really a game changer for the industry and for Silvergate because we were the first bank in the world to actually bring this the legacy banking system that only operates forty hours a week Monday through Friday, into the seven digital asset market that trade around the clock around the world. So can you describe how stable coin issuers use your services directly?

Where are you in the ecosystem because obviously, as you mentioned, you have a lot of clients who are in the broader crypto space f t X and all these exchanges and so forth. How would a stable coin issuer what value do they get from silver Gate? Yeah, so, so they use the sen and our a p I for the important you know that that on ramp and off ramp.

I've often tried to just describe what we do is, Hey, we are the regulated on ramp from the US dollar and other fiat currencies into the bitcoin and digital asset market. And then likewise we are the off ramp from that the digital asset market back into fiat currencies and the way that's done. And so let's talk about the stable coins, the stable coin issuers who use our platform. So, UM, they are all of the regulated US dollar backed stable

coin issuers. And UM, by that distinction I heard in your opening remarks, you were you were distinguishing between the different types of stable coins, the dollar backed ones are the only ones we back. UM, So we don't bank bank the algorithmic stable coin offerings, nor do we, um, you know these other you know stable coins that are maybe collateralized by other digital assets. Um, those are those all they don't need a US dollar bank because they're

not backed by U S dollars. So by definition, but importantly, we also don't bank Tether. And believe it or not, we had the opportunity to work with Tether very early on, but because they weren't inside the United States, and you know, again we're very serious about regulation and and so we looked at it and we thought, you know, this is an interesting idea Tether was launched before Circle um launched the U S you know USDC, so we thought, yeah, gosh,

that's an interesting idea. But they're offshore. We can't really get our hands around, you know, their regulatory status in the United States and so so we were not able to bank them back then, so back in two thousand seventeen, nor do we bank them today. So that's what we

don't do. What we do is for U S d C, for the packs dollar, which is issued by pass, for the Gemini dollar issued by Gemini, and for true US d UM they use the san and our a p I for the minting and burning of their tokens, so they're they're those tokens are issued when a dollar hits their silver Gate bank account, and it's all programmatic and so so if if somebody wants to purchase U S d C from Circle, what they would do is they would send dollars into circles bank account at silver Gate,

and when those dollars hit the bank account, then at that moment, there is an a p I call from silver Gate to Circle that says we just received X amount of dollars from this customer, and at that point Circle knows we have the dollars in our possession, so they turn around and they meant the U s DC token and send it to the wallet address of that that institution that is looking to purchase the U s

DC And then the same thing happens in reverse. So if someone wants to redeem their USDC and go back to U s dollars, they send the USDC to to the wallet at Circle Circle. At that point, once they have possession of the U s d C, they then send an instruction to us via a p I and we then in turn will send the dollars back to that prior USDC tokenhore. So, can I ask a step

back question, a broader question about the space? Is there an irony here that you know, a lot of crypto is sold on the basis that you can have financial assets that sit outside of the traditional financial system. And you mentioned one of the things that got you interested in crypto in the first place was this idea of, you know, be your own bank with bitcoin. But you know, fast forward some years and you are a bank that

deals in the crypto space. Isn't there a fundamental tension there about having a financial system outside of traditional regulation, but still needing to be plugged into a regulated financial entity. Yeah. So, um, so get an important distinction. What would be that these entities that we're banking aren't operating outside of regulations. That

would be the first thing I would say. But to the broader kind of fundamental question, I distinctly remember when I was talking with our team internally about this back in two thousand thirteen, and um, you know I and this meme was be your own Bennic, and my thought process was, well, if this takes off, you know, it's going to take years. It's going to take decades. I've been in banking for forty years, so I've seen all

the different things. I mean, I was there right as reg Hugh was being repealed, which limited the amount of interest that you could pay on deposits. I was there when the first A t M s were being installed. So I've seen all of this quote unquote innovation. Bitcoin is the true innovation in my opinion, but it's not going to displace government, sovereign government's desire to issue their own currencies. And so I view bitcoin as you know,

you guys are very familiar with the meme. Digital gold, you know is a way to save a portion of your wealth. And I think that we still need to operate in the financial world with fiat currencies, the world that we actually live in UM and and just like some some people might might try to, you know, try to save some of their wealth in gold or in some other you know, in stocks and bonds, etcetera. I think bitcoin UM is certainly an alternative, but I don't

think it's going to replace the dollar. And so I actually think silvergate is perfectly positioned to UM. You know, kind of have a foot in, you know, in both ecosystems. So you're the owner of the assets that were DM so Facebook for a few years at least, I think starting in twenty I think starting they tried to get their own stable coin off the ground. It's gonna be sort of a global thing. It just never really worked. Why couldn't What was the problem from your view? Why

didn't that work? And one of the asset what constitutes the assets that were left over that you've played, Why it didn't work? You know? Unfortunately, I think it's because it was Facebook, you know, I I will say early on, I think you know, they not only you know, kind of raised the ire of the US government, but of of you know, a lot of governments when they when they announced that they were going to issue this and make it a you know, backed by a basket of currency.

So it's like, well, let's let's not only you know, upset the US, you know, the US government, but let's upset you know, all of these other sovereign nations who are issuing their own currencies, and let's make it a basket, you know. So so I I think they quickly realized that that it needed to be backed by a single currency. Unfortunately, by that time, you know, I think they were just in the crosshairs and no matter what they did, you know,

they tried to move off shore. Um. You know, they were a Swiss entity for a while trying to issue a U. S Dollar back token. That you know, if you just stop and think about what I just said, um, you know, that's you know, that's gonna be problematic, a Swiss entity issuing a U. S dollar back token. And

so you know, there are a lot of challenges. But at the end of the day, what we saw as the opportunity, and I should mention we were not involved with Facebook um at all during any of that we ended up coming on the scenes late, so they had as as you'll know. Just remind you that they started out as Libra. They then switched to ink too d M. They then moved to UM at some point in that they moved from the US to Switzerland. And during that entire time, we at silver Gate we're looking at the

feasibility of issuing our own stable coin. So we were already banking UM, USDC and some of the other early entrants UM, and we were looking at the pros and cons of whether or not we should issue our own Why would we do that? Well, back at that time, the thought process was what we've We've got this send the silver Gate Exchange networks. So a lot of our customers are using the send to transact dollars U seven.

But that's not on a blockchain, it doesn't candidate, it doesn't need to be to do an an intra bank transfer UM. But if they want to take their dollars outside of silver Gate, well then oftentimes what they were doing was they were starting on the send, they were then buying a you know, USDC UM and then taking that U S D c UM to places where where UM, where they didn't have a silver Gate bank account, for instance, and so we started thinking about whether or not we

should issue our own. We did the legal permissibility analysis, UM we we believe that it's legally permissible for UM for us to issue a stable coin. We have not actually heard anything to the contrary and all the conversations we've had with our regulators, so so we do believe

it is legally permissible. And we were getting ready to, you know, kind as they say, go to Washington and talk about this back in March of right as the pandemic hit and so obviously everybody's priorities shifted a little bit, and so we we cooled our heels in the first and second quarter of but we were still working on the idea. And it was late where we actually were approached by the d M Association and they wanted to talk with us because they were familiar with our ability

to mint and burn tokens. And at the time they were working with four other banks. I don't know who those banks were, but four other large banks, and the concept was these four banks were going to hold the reserves, but you know, each of them was going to hold of the dollars back in these tokens, So you're gonna have this this broad array of banks holding the reserves, but none of those banks really had the capability that Silvergate has developed to be able to interact with the

technology mint minting and burning and all of that. So what, you know, what what we looked at at that time was, well, this is a this is a completely separate use case from what we had been contemplating, you know, to go back, you know, to what I was saying a minute ago. We were were contemplating potentially issuing a stable coin because we saw the value in helping our customers have a dollar token that could be used in the crypto ecosystem.

But what the d M Association was trying to do was really take this concept of a tokenized dollar to be able to use it for for for commerce, for payments, for remittance, you know, not cryptocurrency trading. And that was

fascinating to us. And again right at that intersection of hey, we're a bank and banks participated in payment systems, and wouldn't this wouldn't this be interesting to be able to unlock the ability for people all over the world to have a tokenized dollar in an app on their phone that they could use to pay for things and and that would be interoperable. And so that is our our thesis going in and so we said, yeah, we'd absolutely

like to be a part of this. Um As we worked with the d M Association over the first six months, it got to the point where they abandoned that multi bank kind of approach, and um we agreed, and we announced in May of last year May at silver Gate was going to be the exclusive issuer of the d m U S Dollar and and so um that was you know, that was at the time a big deal for us, and obviously we thought that we saw a path to us participating and you know, partnering with them

to issue the d m U S D. Unfortunately, um AS is now somewhat ancient history. There's a President's Working Group of regulators. It's called the President's Working Group. It's the U S. Treasury, the Federal Reserve, the SEC, and the CFTC and um they've been looking at this question

of stable coins. They were doing some work last year, you know, to address the potential regulation for stable coins, and so we were strongly encouraged to wait and to not launch last summer and to wait for that work to be done, and that report was issued on November

one last year. What's it been like generally to work with regulators and you know, people like the Federal Reserve because my my general impression of it when it comes to the crypto spaces that often it's sort of like it's better to just do it without asking permission and you see no. But honestly, when you apply to the regulators officially, you tend to get rejected, whereas if you go out and do it, I mean, I'm thinking specifically of tether Um, if you go out and do it

like often you you just kind of get away with it. So I'm curious what those conversations are are actually, Like, yeah, Tracy, it's it's a it's a fair question, um. And you know, at times some of our investors, you know, have asked us the same question, Well, why don't you just you know,

watch something. Well, I think there's a big difference between a a regulated bank that is already operating under the supervision of you know, and under the authority of these regulators, um, these different regulatory agencies, versus a tech startup that's going to spend something up and launch it in into the Market. But to your question of what's it been like, you know, our our regulators have really come up the learning curve. I mean, we've been doing this now, as I mentioned,

for for eight years. And just to go back for just a second, in two thou fourteen, we did a version of what you're suggesting, obviously at a very small scale, but we started opening accounts for for these these customers such as Second Market at the time, but we were confident that we understood how the existing regulations applied to

that activity. So you know, there have been finns and guidance issued in two thousand third team there there was clear guidance for how we bank should interact with the money service business. So but what we did was so we applied these existing regulations to to the activity that these um customers were engaging in. And then we invited our regulators into our offices in the summer of two

thousand fourteen and we gave them a bitcoin tutorial. Not to be unfair to them, but bitcoin was brand new and in two thousand fourteen when I asked the question, so it was the State Banking Department and the FED, and I asked the question if they had heard of bitcoin, and there they were thinking about it, well, is that kind of like, um, you know, banking marijuana companies, um, you know, and so it was kind of all, you know, it was very unclear, but I I could show you

the presentation. It was like an eight page or fourteen page presentation. This is what bitcoin is and these are the types of companies that are being formed. Um, this is the finn Send guides that came out last year. This is how we're thinking about banking the companies. We engaged very early with our relators and then over the last eight years they've been in at least annually, and most years they've come in for an interim visit to kind of look and make sure that you know that

we're doing everything appropriately. So our regulators have had a long time to go to school on the different things that that we're doing. Um, I'll just mention one other thing off topic. But we also offer loans collateralized by bitcoin, and that was a that was another path that we went down with our regulators starting back in two thousand and nineteen, where we did the legal analysis. You know, we satisfied ourselves that it was permissible to lend against

bitcoin as collateral. We then engaged with our regulators. We told them how we were thinking about doing it, all the risk mitigains that we had in place. We launched a pilot in early ran that pilot for several months, UM, and then came out of the pilot. Now back then in in two thousand and twenty, and we sit here today now with over a billion dollars in send leverage commitments. We call the product send leverage. And so that's another

example of engaging with our regulators. And so Tracy, they've they understand this this technology, they have bigger questions. So when we get back to d M, and I want to tie in the last part of your question, UM, which was, Okay, we bought these assets, UM, what what did we buy? And what do we plan to do with it? So when the President's Working Group Report was issued in on November one of last year, it clearly UM stated a preference for stable coins to be inside

the banking system. So we're a bank, so we can check that box. UM. The other thing that it clearly said was there was a desire to see that these payment networks were essentially not UM, you know, kind of controlled by I forget the terminology that was used. But I'll just say big tech okay, um, you know, we can go back and look at the actual language, and so look at we look at that guidance and then you know, kind of breathed a sigh of relief that

we had not gone ahead and launched. So to your point, Tracy, they didn't tell us no, you can't do this, you know in the summer. What they strongly encouraged us to wait until this guidance came out. And once the guidance was out, it was pretty clear that nan if we had launched with with DM, we would have then been operating a stable coin that was in direct contravention of what the regulatory guidance was. And so so we were glad that we hadn't moved forward at the time. And

now to your question, so what did we buy? So at the same time that we read the report, the d M folks read the report, they were looking at that, and we called them up and we said, well, what do you guys think And they said, yeah, you know, we think we're gonna We're gonna pause. This effort. Looks

like we're kind of dead in the water. My words, not theirs um and so we're going to engage strategic advisors to help us figure out what to do with, you know, with this because the one thing I can say with confidence is, you know, they didn't spend Facebook, who was the initiator of this. They didn't spend two or three years and you know, you know, millions and millions of dollars with some of the best software engineers in the world. They didn't build this technology to turn

around and sell it to somebody else. Um. But yet that's where they found themselves. And so we looked at that. We had been ready to go, um, we had done all that work to integrate with them, and so we looked at the tech and and we said, you know, this is actually purpose built for payments. They had some of the you know, best technologists in the world building it. They had a lot of digital first retail platforms ready to engage with it to start offering it to their

retail customers. And so let's let's see if we can acquire this technology and and then you know, we'll just come back to where we were a couple of years ago, and we'll issue it ourselves. And so that's what we bought in January. So we bought the protocol itself, which is open source. And you know, some folks have said, well, gos, what did you really buy because isn't this open source? It's it's absolutely open source, and we think it needs

to be. People need to be able to look at the blockchain, just as we looked at the blockchain back in two thousand fourteen when we were looking at bitcoin transactions because we wanted to verify that leg of the transaction.

So it's open source, but importantly, there are proprietary regulatory compliance elements that have been built on top of it to satisfy the Know your customer, the anti money laundering, the b s A requirements, um So buying all of that together in furtherance of then us being able to issue our own stable coin, and again for the use of payments and remittance and not for a cryptocurrency you

use cans. So I want to ask another regulatory question, which is what, in your view should back stable coins? Should they be entirely say, short term treasuries like one to one because this is a big question. And then also if there is going to be sort of non perfectly liquid assets like maybe there's some commercial paper or

maybe there's some more longer dated treasuries. Is their risk of contagion to the broader financial system if in a crypto crash and people want to pull out, stable coin issuers have to liquid date some of their assets rapidly. Like I know, you're not in the business of actually holding them, because if you talk of the assets, because you're in the uh, the API, the minting and burning of stable coins. Nonetheless, I want to get your take on if I buy a stable coin, what should I

expect in terms of what's backing it? And then this sort of like potential spillover effects of crypto volatility into assets that don't necessarily have that you know, uh, into the into the broader financial assets. Yep, yep, great question. Uh. And we think a lot about this because candidly we treat sin and all, you know, so so we have UM.

I don't think I've mentioned this yet, but we have over fifteen hundred institutional customers at silver Gate in this initiative who are using the sin every day and UM as an example, in the in the first quarter of this year we had a hundred and forty two billion dollars, so we're about you know, fifteen sixteen billion dollar bank. In terms of total assets, we had a hundred and forty two billion dollars move across the sin in the

first quarter of this year alone. That was actually down quite a bit from the fourth quarter UM and as you know, the currency trading was down, but in the fourth quarter we had over two and so what that means is that we have to stay liquid. There's different definitions of liquidity, right. The way we define it as is that we we have a very large investment securities portfolio. So on fifteen billion in assets, we probably have twelve

billion in investment securities. I already mentioned, you know, we were the collateralized bitcoin lending UM. You know, we we have about a billion dollars in commitments there. But the overwhelming majority of our balance sheet is in investment securities. Now they're not all treasuries, but but they importantly they all trade actively. You know, the types of securities that we buy as a bank, we can we can trade

out of those on any given day. Obviously, if if they're longer in duration and interest rates have gone up, then you know we're gonna have to take a haircut. But we do look at at this and this is one of the reasons we don't We don't pay interest on our deposits. And we don't and and we actually encourage our customers to only keep as much at silver Gate as that they need for for their for their

trading and investing activities. We you know, you you mentioned Joe that you know that we don't hold all the reserves for USDC. For instance, usdcs over fifty billion dollars. We're only a fifteen billion dollar bank, and we have customers, so obviously we don't have the majority of those dollars. They're spread elsewhere in the banking system. And there is you know, um, there are other banks that have obviously since we've got into the space, or other banks that

are banking this this crypto space. UM. And candidly, I think what they're doing with the deposits, and this is not criticism, this is just a factual statement. They are doing what we did back in two thousand fourteen, which we looked at this and we and thought, heck, this is a potential source of deposits to fund our lending activities. Um. And and so if if you were to look at some of the other banks that are banking the space,

and what are they doing with the deposits. You know, I think they're primarily using those in some of their lending operations. Um and and again UM that their banks, that's what they do. We have decided that the industry is relying on us as critical infrastructure to provide liquidity.

And when you know, when Tera was melting down, obviously we didn't have any exposure whatsoever to Tara, but that contagion, if you will, that was spreading throughout the ecosystem and causing people to go to cash or go to stable coiner you know, go to a dollar back stable coin. You know, you you can imagine that we might have seen heightened activity across our platform um and and the

industry relies on us for that critical function. So can you talk a little bit more about risk management and specifically in the context of this sort of one way risk which is basically what we saw over the past month or so when Tera Luna collapsed, which is that you had bonds and stocks falling, you had all sorts of crypto and tokens falling at the same time. There was lots of anecdotes about people potentially having to liquidate positions in order to pay off collateral on margin that

they needed to to pay because of the volatility. How do you actually handle that risk, because it feels like with a lot of crypto, it's basically crypto exposure kind of squared and also pegged too, occasionally tied into stocks and bonds, so it's sort of it feels like it

feeds on itself at certain times. I what I can say about the way we're set up at silver Gate is because we are not the bank that is holding like the reserves, we technically do, you know, don't want to be their primary bank in the sense that you know, where I've spent most of my career as a business banker. You know, the idea is, well, gosp let's get them, let's get the operating deposits, let's make them alone, you know,

let's get the full relationship. We take a very narrow view here, which is, you know, don't keep with us excess deposits that are needed for other things, because we are primarily a liquidity source. And and so what that means, Tracy is is that when when there's this type of activity, we see a lot of money going through our bank, but um, but we actually see our deposits. I talked about this on an investor call last week. I I referred folks on that call back to our earnings transcript

at the end of the first quarter. If you remember back at that time, you know, pandemic hit markets were crazy. You know, Bitcoin sold off, you know the crypto markets were selling off as well. And what we saw back at that time was a surge in our deposits. And and we reported on that because it was quarter end. We said, look, our deposits are elevated at quarter end.

We believe that's temporary. Um And by the time we released our earnings the third week of April, we're already seeing deposits kind of normalized, and we reported on that fact. But critically, we are this critical um, you know, piece of infrastructure where where folks as their exiting the ecosystem, we're wanting to go to cash. Those dollars passed through silver Gate and then end up wherever they're going to

put them. Sometimes it just ends up at USDC, in which case those dollars aren't going to sit at silver Gate. They're gonna sit it in Reserve, but they might pass through us on on their way. One of the things I mean, we've been bent managing liquidity this way since we launched the SIN in two thousand seventeen. Back at that time, believe it or not, we were a two billion dollar bank and we we had a billion dollars in crypto related deposits. We were holding almost all of

that at the time at the Federal Reserve. Because when you're going are these times of of liquidity and stress, you want to make sure that you're not investing those those those funds um you know, into something that's more long term, because you don't know how sticky it's gonna be. I just want to go back to this point earlier. It's like about contagion. Like we have seen Tether's total assets shrink in this latest market volatility, so presumably it

had to sell some of its assets. I haven't looked at what's going on with us DC. I don't know if it's had to actually liquidate or if people are just hanging out in USDC. But is there risk of volatility? I mean, you expect, obviously the stable coin industry to get much bigger, otherwise you wouldn't be in it, you know today, One like, is there risk of crypto market volatility, forcing liquidations and other assets and therefore spreading volatility elsewhere

into the financial system. Yeah, I certainly think that's one of the things that the regulators are concerned about. And that's you know, if you go back and look at the President's Working Group report that I've referenced a couple times already, you know, they there are concerns about contagion and you know this points of liquidity stress, etcetera. Which is which is candidly one of the reasons that that that we think, you know, from our perspective, and I'm

not you know, hey, I'm a free markets guy. UM. Clearly USDC has found you know, product market fit, right. I mean they didn't you know, they weren't sitting in their garage trying to come up with something they hoped that the industry would use. They launched something, and the industry, you know, has said yes, and and they're speaking with their wallets, and there's over fifty billion dollars of UM

you know backing USDC right now. What What we see is UM is that there is a there is a need for a tokenized dollar to be used by consumers to pay for things. UM. And you know, the way. And I know I'm getting off your question, Joe, But but but this is important for you know, for me to say, because the way I think about this is not dissimilar to the way I've described how we don't, you know, we don't encourage our customers to keep a

lot of access deposits with us. I think about a tokenized dollar the way I think about a physical dollar bill, or let's let's say a twenty because you know, you typicularly can only get twenties out of the A t M. Right, So if I go to the A t M and I pulled twenty dollars out, well, now that's no longer in my bank. It's not f D. I c ensured. I can take it anywhere and I can use it to pay for something. But importantly, I didn't withdraw all my money out of the bank. I only withdrew what

I needed to transact. So I think that that is that is the place for a silver gate issued tokenized dollar. And and we've also started talking about it internally, and we're beginning to talk with our regulators about this as well. We're getting we're getting away from calling or stable coin because obviously stable coins on a really bad name because

they've proven themselves to not be stable um in many cases. Um. But but for us we're looking at this is Hey, this is a tokenized dollar right now on my iPhone. I have both the dunkin Donuts app and the Starbucks app, and I can load both of those with value. But guess what, it's not interoperable. I can't pull it back off. Um. And and I you know, I can't take my dunkin

Donuts app and pay for a coffee at Starbucks. And so so what we see and this is a longer view and it's going to take a while to get there, but everything in the world is moving digital um. And people say, well, money is digital too, And that's true for all of us in the first world, but there there are many people that don't have access. They all have phones, um, but they don't have the ability to

pay for things. Um. And so I just view a tokenized dollar as a way to take some portion of your value that whether you have it sitting in a bank account or whether you have it sitting in bitcoin, pull that out, put it in a digital wallet on your phone so that you can use it to pay for things, whether that be an online merchant, whether that be at a physical merchant, and so that's that and and to me that shouldn't create any concern about financial

contagion and runs on the bank and all of that stuff, because it's no, it's no different than withdrawing cash out of an a t M. So Tether okay, clearly controversial in many ways. There have been questions swirling around what exactly is backing it for many many years. Now. You have a vantage point where you see the flows and the mechanics of what happens when stable coins are are moving or not moving. So you described, for instance, when we had the big run recently, there was an increase

in your deposits and lots of money flowing in. Can you give us your take on tether and what exactly is going on there, because I think a lot of people are still concerned about a lack of transparency on the backing and a lot of people have also been looking at the deposit data for tether and I think their bank is UM. It's in the Bahamas, right, like Deltech or something UM And and basically saying that we don't see deposits moving in the way that you might

expect when tether is actually moving. And again, this is something that's supposed to have billions and billions of dollars worth of assets backing it. So could you maybe just give us your opinion of what is going on there. So, unfortunately, my knowledge is is limited, UM, just as the rest of the of the world's knowledge is limited because you know, we don't bank them, as I mentioned, UM. But what I can tell you is that our customers who use

tether um. You know, we have customers all over the world. We have customers in Europe and Asia and Latin America UM, and those customers that use tether do not have the same concern that I hear that you just you know, are articulated. And so there's a there's clearly a difference in perception between those who are inside the ecosystem and

those who are outside of it. Now I don't know why that is, Tracy I, but I do know that when we talk to our customers, because we've asked them, you know, what if we were to issue our own staff This goes back obviously like two thousand and eighteen nineteen.

What if we were to issue our own you know, how do you view tether um and they use tether because it works, and so unless and until there is a run um that actually causes them to burn through all their cash and then their securities and then you know, theoretically their commercial paper and you know, it's it's it just works. And there are, by the way, also use cases that I've heard of where people in other countries who want to hold old U S dollars because they

might be in a country that that is experiencing hyperinflation. Um, they're comfortable um. And these are like consumer folks. They are comfortable holding holding color um as as a dollar proxy. UM. And you know, I I don't know that how widespread that is, but I've certainly heard that. Ellen. Thank you so much for coming on. This is just like such a big area and we know there's like tons of money going into this space and it's so crucial and

so really appreciate getting your perspective. I feel like we could probably do like three hours actually on this topic. We'll have to have you back because I think, like stable coin design, stable coin regulation, the business of stable coins is not going away anytime soon. So I appreciate you coming on. Udlines. Yeah, I really appreciate the opportunity. It's um, I'm happy to come back anytime. Absolutely love this space and I appreciate all the work that you

guys are doing. Absolutely, thank you girl. You know it's interesting was that Ellen said that they might think about rebranding stable coins, that it does seem like it's kind of gotten tarnish because on the one hand you have tarra usd, which is not stable, and then on the other hand, the other stable coin is tether and people are just sort of suspicious of it for obvious reasons.

So it's like, if you're gonna launch something, maybe that's smart, like call it a tokenized dollar or something else, because I do think it's sort of a dirty word at this point. I agree, But you know what this whole thing reminds me of, and this is a slight tangent, but like it is actually really a parallel to what's

going on here. Do you remember pure to pure lending? Yeah? Absolutely, okay, So peer to peer lending this whole idea that individuals could lend to other individuals and thereby bypass the banks completely. And the irony was always that there was actually a bank underwriting all these loans. It was called web Bank, So this kind of you know, reminds me. Um. So

that's point one. And then secondly, they also rebranded from peer to peer lending to direct lending once it became very very apparent that the lending was not in fact peer to peer, So it kind of reminds it reminds me a lot of that. That's a that's a really good analogy, you know, speaking on the Tether point, and

this came up. You know, I think, like going back to the first time we ever interviewed Sam Bankman Freed, it really is striking the degree of confidence that people in the industry have with tether and their comfort that they have redeeming and minting and burning tether versus the outside skepticism. It's like there's huge bid Esque spread, so

to speak on tether as a concept. I mean, it would be pretty amazing if all of Tether's problems just boiled down to like a perception gap and a bad pr strategy between people who understand it and people who are outside of the space, Like that would be pretty insane and also a massive own goal for the company itself. Um But that's kind of what we hear consistently. It's like well, the people who deal with it have full faith in it, and people who are not dealing in

it are extremely skeptical. Yes, But on the other hand, note that Allen is not a Tether business partner, so it is striking that. I mean, again the reasons for that, they're offshore, etcetera. But here is the company that's sort of like, is the core banking infrastructure to all of crypto, and Tether isn't one of them. So you know there's something going down there, and not necessarily bad per se, but there's a reason you know, silver Gate is not a t other business. Yeah, but I do think getting

back to that rebranding point. I mean, we started out this conversation by saying that the marketing here matters. And if you say you've created a stable coin and it's one for one with a dollar and then it isn't, then that's an issue and that's something that regulators you know,

will pursue and will be interested in. But if you morph into something like a tokenized dollar or I don't know, call yourself like a variable stable coin or something like that, I don't know, then then maybe that does lessen some of the pressure. But of course the question is whether or not you're sort of um abdicating your original use purpose. I also think this question of like, Okay, if something is going to be called a stable coin or whatever it is, well there's gonna need to be more rules.

I think about what actually backs it and how much it has to be backed by short term treasuries or long term treasuries or things that absolutely our dollar equivalent versus other assets. Because as they get bigger as an industry, these sorts of like stresses are going to emerge. And again going back to the financial crisis, the lesson is crises happen in essentially assets that are deemed to be stable,

like that is the source of trouble. And so how what they what they can really hold, how liquid they have to be, how fast they have to be able to liquidate their assets to meet redemptions are sort of like huge questions that I think we're gonna need to just get like clearer answers on. Right, So I guess there's two options here. One is you agree these are safe assets, They're supposed to be safe and there's going to have to be some sort of oversight on them.

Or two you say, actually, maybe they're not that safe, and you step away from that marketing and you go in a totally different direction. But then again the question is what impact does that have on crypto? Yeah, now it's a fascinating We We really could probably talk like three hours and go down all kinds of little avenues on this, because it really is like pretty big to think about the future of crypto, the stable coin rabbit hole.

It's also, i mean, it's also just interesting from the perspective of what is money and what is the financial asset and what makes something safe and contagion effect and anyway, Yes, you're right, Okay, we should stop. Shall we leave it there? Let's leave it there? All right? This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisen't though. You can follow me on Twitter at

the Stalwart. Follow our producer Carmen Rodriguez at Carmen Armann. Follow the Bloomberg head of podcast, Francesca Leivi at Francesca Today, and check out all of our podcasts at Berg under the handle at podcasts. Thanks for listening to to