Latest / What Bitcoin Did / Operation Choke Point 2.0: The Fall of Silvergate | Alan Lane

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Operation Choke Point 2.0: The Fall of Silvergate | Alan Lane · What Bitcoin Did

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  And then all of a sudden the run accelerated and within a matter of a couple of weeks it was,
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  you know, I mean we experienced the biggest bank run in history. We had instances of being debanked
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  ourselves, you know, I'm not gonna, you know, throw stones at anybody but there were counterparties
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  that want, were trying to distance themselves from us that we relied on to provide services to
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  our clients. We were not going to be permitted to run a bank focused on the Bitcoin or the crypto
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  market. It did become clear very quickly that FTX were not what they said they were going to be.
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  What was happening internally at the bank when you saw that happening?
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  Let's do it. All right, Alan, I am so excited for this show. We've been talking about doing this for
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  so long. And for anyone that isn't aware of the story, they're about to hear about
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  probably one of the biggest stories in Bitcoin ever, certainly the last five, 10 years.
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  And it's not really a story that's been told. So I'm very glad you're here.
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  I appreciate the opportunity.
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  Of course. But we should start by, like for any of the audience that don't know who you are,
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  let's go through who you are, your background, and then what happened in the early days at
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  Silvergate. When did you start with Silvergate?
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  Sure. So I started at Silvergate in December of 2008. Little did I know that a couple of months
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  before I started, the Bitcoin white paper had been published. And a month or so after I started
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  at Silvergate, you know, January 3rd, 2009, but I was fully, you know, immersed at Silvergate.
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  But just to back up a little bit, just to give you a little context. So I started in banking
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  as a teller while I was in college in 1981, 45 years ago. So I've done a lot of things,
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  I've been with a lot of banks over the years, but I also spent several years in the 90s before many or most Bitcoiners were born in private industry in both retail and manufacturing as CFO, CEO.
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  And so I had a pretty broad business background.
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  I went into businesses as kind of a turnaround guy in the mid-90s and got back into banking in the late 90s,
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  initially as a chief financial officer, then as CEO of a community bank, built that bank, sold it,
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  and then did a couple of other things along the way before I found my way to Silvergate in 2008.
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  And when I joined Silvergate, it was the smallest company I'd ever worked for, 38 employees,
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  four branches a little under 300 million in assets so very tiny niche primarily did
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  commercial real estate lending and purchased residential mortgage loans and had a securities
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  portfolio but it wasn't a business bank didn't have really customers that walked in off the street
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  so it's very small based in san diego and but importantly this was right at the height of the
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  financial crisis in 2008. It was small, clean, and well capitalized for a small size bank.
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  And so it was really well positioned to take advantage of whatever opportunities were going
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  to come along during the great financial crisis. And so did you go in there as CEO straight away?
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  I did. Okay. And when you joined that bank, obviously very small community bank,
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  what was your plan for growth? Yeah. So as I mentioned, Silvergate was privately owned.
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  The chairman and CEO at the time owned, I think he owned 25% of the bank.
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  And he had put together an investor group when he bought control of the bank about eight years earlier.
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  I think it was late 90s when he took control of the bank and was essentially just running it as a finance company.
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  He had a commercial real estate background, had cut his teeth at Goldman.
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  And so, but he recognized that in order to really get any value out of this investment
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  that he had made, he was going to have to turn it into more of a community bank with
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  real deposits, core deposits, you know, et cetera.
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  And so my charge going in there was, let's turn this into a business bank.
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  That's, you know, I'd been in business and the banks that I had run previously were more focused on commercial business banking as opposed to commercial real estate.
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  And so we were going to become a business bank.
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  And the challenge at the time was that every other bank in the country that was still standing during that great financial crisis, they were all choking on their real estate exposure.
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  Yep.
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  And so they all, all of them had decided to, they wanted to be a business bank.
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  So there there we were really small platform and we were trying to be a business bank while every other bank in the country was saying Hey um you know we can lend against residential And so we actually pivoted right after I got there
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  and went all in on banking residential mortgages. Now, we did that through a mortgage warehouse
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  operation. So we were providing financing to mortgage brokers all over the country,
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  mortgage bankers, essentially. And so while everybody else was getting out of real estate,
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  we went all in on it and grew very successfully over the next four or five years.
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  And what we didn't have was deposits.
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  We didn't have a deposit franchise to fund our loan growth.
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  And that's really what led me into looking at Bitcoin.
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  So at this period, you bought the bottom in the housing market.
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  You had good growth.
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  And then 2014 is when you first started doing things with Bitcoin with the bank.
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  But when did you first start hearing about Bitcoin?
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  So it wasn't much earlier than that.
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  So 2013 was when I first got interested in it.
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  And it was just an intellectual curiosity personally.
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  I was reading about Bitcoin, that with Bitcoin, you could be your own bank.
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  You know, at the time, I had been a banker for however long that is, you know, 30 plus years.
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  And so I thought, well, I wonder how that works.
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  And we had developed a little bit of a reputation at Silvergate of being a bank that was interested or that was willing to consider, you know, things that weren't quite normal for a traditional community bank.
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  Right. And so I was starting to get introduced to to some folks.
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  As an example, there was a company that was they were an OTC desk.
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  They were a broker dealer and they were enabling their clients to to buy Bitcoin.
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  And so we started looking at it through the lens of, well, if we offered banking services to them, what what would be required?
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  And, but at the time, we certainly had no idea that it was going to turn into what it turned into for us.
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  But to back up at the time, we were looking for deposit sources.
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  We still had the same challenges that we were a small bank trying to bring in deposits.
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  Limited branch network, growing branches is, it's always been slow.
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  It's virtually impossible now, you know, especially in this digital age.
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  that we're in. And so looking for other niches. And as I went down, and I'd like to say I went
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  down the Bitcoin rabbit hole, but that was really later. But as I was just looking at, okay, well,
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  what is this new thing? I discovered that there were companies that were raising venture money
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  and they were getting kicked out of banks. And the example I often used back in the day was
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  Coinbase. They had raised, I think, $20 million. And I thought, well, gosh, if here's a company
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  that raised venture money from reputable VCs, they're trying to do all the right things from a
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  regulatory compliance standpoint. They've heard of AML, BSA, and they're trying to do those things
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  in a regulatory compliant manner. And if we can find a way to bank them, then maybe they can take
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  that venture money and deposit it with us. I had no concept of the SIN, which we'll talk about later,
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  but it really was more of just a business banking offering for a niche industry that was starting.
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  And all they wanted to do was open a bank account, deposit their money, and pay their employees and
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  their rent and all that. So to me at the time, it just looked like a business banking opportunity
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  on the deposit side, it obviously became much more.
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  And so when you say you needed to find a way to bank these people, what does that mean?
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  Like, why were they getting kicked out of the other banks?
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  And were you the only one that was looking to actually offer them a solution?
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  Yeah, I'm not sure whether other banks were looking to offer solutions.
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  I was aware that these companies were getting kicked out of banks.
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  And the issue at the time was, you know, a lot of people in the industry have heard of
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  operation choke point 2.0 yeah well at the time in 2013 and 14 we were kind of on the heels of
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  the original choke point um no one called it choke point 1.0 it was called choke point and
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  this was the gambling industry yeah exactly and and um so you know was gambling and and other
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  you know other things that um that were unfavorable let's call it you know we weren't in those you
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  we weren't banking any of that stuff but we recognized that these companies these um bitcoin
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  companies i should also mention you know this was bitcoin only at the time you know i mean
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  crypto wasn even really a thing right you know i mean it was bitcoin and um so we recognized that these companies were kind of getting lumped in with the online gambling and you know all the other stuff as part of the choke point
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  What it really had to do with was the regulatory framework.
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  So in banking parlance, these are these are considered money service businesses.
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  Right now, in my commercial banking career, working in community banks, I was very familiar in Southern California, especially with money service businesses from the perspective of like a, you know, a bodega, a grocery store where they would also allow, you know, maybe migrant workers to cash their their paychecks.
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  you know, those kinds of things. That's, that's a money service business because that, you know,
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  that is a, a retail store that is cashing a check for a third party, right? Which is, you know,
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  they're not in there just to buy groceries, but they're actually in there cashing a check.
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  And so there's an absolutely, there's a regulatory framework that existed even back then for, okay,
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  this is a money service business. And, um, so there's, there are specific things that a bank
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  needs to do in order, you know, and it's know your customer. What is the source of funds? You know,
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  all of those things. And so what we looked at was, okay, is there a way that we can bank this type of
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  activity? And what would be required? Now, the other thing that's interesting is in earlier that
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  year, 2013, was when the first FinCEN guidance came out. So there was FinCEN guidance, I think
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  it was in March of 2013, that was the first regulatory guidance around, as the term was
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  called then, virtual currency.
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  Okay, so you can go look at this guidance issued in early 2013.
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  And we looked at that, and they basically, FinCEN outlined three different types of activities.
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  There was a user of virtual currency, an administrator, or an exchanger.
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  I think those were the terms.
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  And so we looked and said, OK, well, which one of these buckets does a company like Coinbase fit in and what are the requirements?
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  And so once we got comfortable that we understood that, we then had a conversation with our regulators in 2014 and said, OK, this is the type of activity.
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  We did kind of a Bitcoin 101 tutorial and we were launched.
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  And so when you started taking money from Coinbase and these other companies that were sort of new in the Bitcoin space,
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  was there any pushback from regulators, not even just in that meeting, but in the following 6-12 months?
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  There was nothing?
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  No.
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  And is that because of the scale of it? Because at that point it was still relatively small.
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  download their free report at expatmoney forward slash wbd That expatmoney slash wbd for your free report You know I would say that I don know that yeah it was probably in part because it was small
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  In part because, you know, the activity certainly wasn't unusual for, you know, if it's a money service business, by definition,
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  They are essentially transacting with other people's money.
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  Right.
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  And there's a regulatory framework for that.
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  And as long as you build the appropriate controls, then that's an activity that that you should
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  be able to bank.
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  And and so, you know, and I should say that, you know, Coinbase wasn't wasn't our first
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  customer.
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  I use them as an example because of the fact that they had raised a pot of money.
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  Yeah.
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  And I was looking at that and saying, okay, if we can attract those types of customers, it could be a fairly meaningful initiative for us.
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  And that's another important thing.
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  And it kind of piggybacks on your question about the fact that it was small.
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  We looked at this as a bank.
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  We were maybe around $500 million in assets.
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  So in five years, we had grown from, call it $300 million to $500 million.
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  That's kind of pretty slow and steady growth.
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  but I looked at it and said, well, gosh, you know, most banks are just kicking this stuff out because
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  it's too small. They don't want to build the infrastructure to be able to handle it.
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  But for us, it could be meaningful. You know, if we could attract a hundred million in deposits
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  from this, you know, it could have a meaningful impact on Silvergate and everyone else is going
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  to ignore it. So it was worth it for us to spend the time to try to figure it out. And as you know,
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  and that any of your listeners know,
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  once you start going down the Bitcoin rabbit hole,
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  there is no turning back.
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  And so, yeah, it was the beginning of a great journey.
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  Okay, so then take me through the next few years that came.
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  How quickly did this grow?
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  You start with, when you first start taking Bitcoin deposits,
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  you're at $500 million in deposits.
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  What did it look like over the next few years?
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  Yeah, so it was slow to take off.
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  For those that have been through many cycles,
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  the end of 2013 was super exciting.
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  That was right when we were getting in,
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  you know, and that was when I bought
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  my first Bitcoin personally.
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  Everyone buys the top.
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  Oh man, you know, and so, and then,
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  you know, so then Mt. Gox happened in early 2014.
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  We had already opened one account
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  and we're, by the end of 2014,
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  we probably only had like a half a dozen clients,
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  probably less than, you know, 20 million in deposits.
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  and um 2015 the i didn't know it was a bear market you know we now have these you know these
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  these terms um you know but it was it was a bitcoin bear market and we were trying to you
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  know we were trying to build a business and and so by the end of 2015 we maybe had a dozen clients
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  um maybe 20 um and but uh importantly we were starting to um get what i would consider to be
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  better quality leads. Okay. So such that in early 2016, that's when we hired Ben Reynolds. Ben,
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  Ben Reynolds, we hired him initially just as a business development officer to essentially go out
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  and try to drum up business in this new initiative that we were running. Ben didn't know anything
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  about Bitcoin, but there wasn't anybody that knew anything about Bitcoin back in, you know, in 2016.
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  and um and you know the way ben would usually describe it is he said you know silvergate had
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  some of the best clients at that time in the industry um and so his he just went back out
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  there and asked them hey you know how can we be more helpful and that question um and really
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  listening to um what people were saying what our clients were saying in 2016 really became
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  the genesis for the Silvergate Exchange Network, the SEND, and then all of the growth. But
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  in 2016, by the end of 16, we maybe had 50 million in deposits. So it still wasn't growing
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  significantly until the bull market of late 2017. And that's when everything kicked off. And so
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  you mentioned the SEND Network then, and that was one of the huge new products that
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  that you brought to the market
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  that we'd never really seen before.
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  When did that launch?
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  So the idea was 2016.
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  We needed to make some changes
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  in the technology platform at Silvergate
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  in order to really build it.
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  We were in the process of doing a data processing conversion.
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  But I mean, the timing couldn't have been better
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  in terms of hiring Ben, getting out there,
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  him getting out there
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  and identifying what some of the needs were
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  because it really helped us determine which platform,
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  which core data processing platform we were going to go with.
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  And it really was all about enabling our clients and our prospects
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  to interact with the bank via API.
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  And back then, you know, I mean, now you go to any legitimate website
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  for any tech, a fintech.
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  And if you're a developer,
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  you can immediately go to the developer website
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  and you can look for all their documentations,
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  their SDKs and their APIs and all that stuff.
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  Well, that didn't really exist in 2016 and 17.
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  But Ben identified that as a need
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  and that caused us to choose a specific platform
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  that would at least allow us to build an API
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  to allow our clients to interface with the core.
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  And so that launched in, I think, late 2017.
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  But 2017 was kind of the pivotal year
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  for the launch of the CEN.
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  We started 2017 with 50 million in deposits
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  in this initiative.
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  And at the time, we had grown to be
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  about a billion dollar bank.
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  So in terms of asset size, we're about a billion dollars,
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  And that portion is not super meaningful.
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  Right.
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  50 million in deposits from the Bitcoin initiative.
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  By the end of March, so in the first quarter, we were 100 million.
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  By June, it was 300 million.
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  And I sent an email to our board with a line from Jaws that said, we're going to need a bigger boat.
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  And I still had no idea what it was going to become.
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  Um, but, and by the way, there was one other thing.
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  Um, we had been trying to stay under a billion dollars in assets and this has everything to
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  do with kind of regulatory thresholds.
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  Okay.
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  Okay.
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  Um, if you're, if you're, um, once you cross over a billion dollars in assets, then there
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  are certain regulatory requirements that kick in.
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  Um, a lot of this has to do with like, um, you know, regulatory compliance, um, internal
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  controls, things that all banks have, but smaller banks tend to outsource a lot of that. And as you
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  get bigger, you start to bring some of that in-house, start to get a little bit more sophisticated.
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  So in 2016 and 17, we were trying desperately to stay under a billion dollars in assets while we
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  were building all the infrastructure. And so as this initiative was growing, we were like shedding
• 23:37
  other stuff. Okay. So, um, we had brought in a lot of internet and brokered CDs to fund the loan
• 23:43
  growth. And so it's like, well, let's let that roll off and we'll fund it with the Bitcoin,
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  you know, with the deposits from the Bitcoin initiative. Um, and, and so that allowed us to,
• 23:53
  um, to stay under a billion. Um, but, um, that, that was in 2016 by, but by the end of, um,
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  By the end of 2017, we had a billion dollars, over a billion dollars in this initiative.
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  And so we essentially went from a billion dollar bank to a two billion dollar bank in a year.
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  And that kind of growth is unheard of.
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  And so we had to raise some money.
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  We weren't public yet.
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  We didn't go public till 2019.
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  So we did a private placement, but realized that if this was going to take off, then we're
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  likely going to need to be public because we were going to need to have access to capital to fund the
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  growth. So tell me what it means to grow like that as a bank, because you said previous to this,
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  you've been growing steadily, slowly, and now all of a sudden 2017 hits and you're growing like a
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  high growth tech stock. This is insane numbers. How unusual is that in banking? It's very unusual.
• 24:54
  it you know we ended up you know because of the growth and because of the niche
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  we started being viewed I think by the regulators as more of a I'll use the term high risk
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  not from the Bitcoin crypto perspective as much as from the growth perspective right it's like
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  okay well do you have the all the infrastructure that that you need in order to handle this growth
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  doing things like managing liquidity. We didn't yet really understand the kind of spikes. But I
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  will also say in fairness to our entire team at Silvergate, because the CEN hadn't really been
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  launched yet, we weren't yet managing the funding the way we ultimately did for like from 2000 and
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  call it 18 or 19 through the end of 22.
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  Because once we recognize that okay the primary way our clients are going to use this is for managing liquidity then we realize okay we cannot use these funds the way we had
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  originally, when we got into this business in 2013, the idea was we're going to use this
• 26:18
  to fund our loan growth. Well, as some of our competitors learned in the first quarter of 2023,
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  if you're using those deposits to fund your loan growth and those deposits dry up,
• 26:32
  if you have a run on the bank, you can't go out to all the people that you lent money to
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  and say, hey, could you please pay me back because I've got to give the money back to our depositors.
• 26:41
  So I don't want to jump the gun here in terms of where we're at in the story,
• 26:44
  but I do think it's worth explaining the way that you were managing that book
• 26:47
  sort of up until this point and then what you changed going forward.
• 26:51
  So when you were getting the deposits in, how were you using that money within the bank?
• 26:55
  Yep. So again, and 2017 is an interesting year to talk about this because, as I mentioned, we had grown to a billion dollars in size, but we had funded it with a lot of CDs, a lot of brokered certificates of deposit.
• 27:12
  Those were typically in dollar amounts of up to $100,000 or up to $250,000, whatever the FDIC insurance limit was.
• 27:23
  But they were chunky deposits, term deposits.
• 27:28
  And so it's really a better match funding for a loan book.
• 27:33
  Right. And but then as the deposits grew and we didn't have the capital to support the growth in 2017, the only way that we could support that growth was to let the CDs run off and essentially replace those with the deposits coming in from from the likes of a Coinbase, etc.
• 27:56
  Okay. Now at the time, the Senn wasn't launched, so the money wasn't moving in and out. It was just,
• 28:01
  it was all one way. It was all coming in. Okay. But it's, it's a great inflection point because,
• 28:10
  because at the time we weren't quite sure the Senn was brand new. And when you're launching
• 28:16
  something like the Senn, and these are all things I've learned, you know, it'll sound like, oh,
• 28:20
  you know, gosh, you know, Alan knows so much about networks. I learned it all at Silvergate.
• 28:25
  You learned all the job.
• 28:26
  You know, we essentially built a two-sided network, right?
• 28:30
  Where we had all of these exchanges, okay, that were essentially enabling their clients
• 28:40
  to buy and sell Bitcoin, right?
• 28:43
  But then you needed all the other liquidity providers as well.
• 28:46
  So all the OTC desks, you know, and so we've often used the example when we were out raising
• 28:54
  and money, for instance, we would talk about other networks, you know, in fact, like Uber,
• 28:59
  you know, and Uber is a two-sided network. You got riders, you know, I took an Uber on the way
• 29:04
  over here, right? But it doesn't work if you don't have drivers, right? And so building that
• 29:11
  two-sided network, we didn't know if it was going to be successful. But the beautiful thing is once
• 29:19
  you start getting that that kind of critical mass it just kind of builds on itself and and that was
• 29:27
  really you know at the time it was like okay you know back back to your question um these funds
• 29:32
  are moving rapidly and um we cannot make a a um a five-year commercial real estate loan
• 29:41
  uh you know and and trust that these funds are going to be here long term and so we started
• 29:47
  shifting and um you know the beautiful thing also is that a traditional bank doesn't grow you know
• 29:54
  the loan side doesn't grow that rapidly right you know and so it wasn't that hard to kind of say okay
• 30:00
  well we can continue to fund this little loan book you know maybe 300 500 million with cds
• 30:07
  and we can with the rest of the money that's coming in from the bitcoin um deposit the bitcoin
• 30:13
  depositors, we'll just keep that in cash and investment securities. And so that was the way
• 30:19
  we managed. So for a while, we kept both going. Okay. And so the other thing you said there is
• 30:26
  that when you reached, you added a billion dollars to the balance sheet during 2017,
• 30:31
  you were getting more scrutiny from the regulators. And their question was like,
• 30:35
  do you have the infrastructure to deal with this? At the time, did you?
• 30:38
  You know, we had kept them, you know, fully apprised all the way along the way.
• 30:43
  I remember when we talked about the Senn and we talked about building, you know, this way for our clients to interact with the bank and exposing an API.
• 30:57
  You know, I mean, a lot of banks back then, I mean, it's funny to talk about this, but I mean, it literally was, you know, 10 years ago.
• 31:03
  very, very few banks had transactional APIs at the time.
• 31:09
  Lots of banks said oh yeah we got APIs But those APIs did not allow a tech company to integrate with the bank to enable transactions
• 31:24
  24-7.
• 31:24
  24-7.
• 31:25
  And, you know, that's the other important thing, which, again, and I give all the credit to Ben Reynolds for this,
• 31:32
  because Ben, when he was out visiting with our clients, and I'm going to backtrack just a little bit,
• 31:38
  But the reason the Sen was born is because when he went out and asked our customers, you know, how can we be more helpful?
• 31:44
  So some of these folks were and these were like the proprietary trading shops in Chicago, as an example.
• 31:50
  They were managing, you know, they're buying Bitcoin all over the world.
• 31:54
  And at the time, there were huge disconnects.
• 31:58
  There was a huge arbitrage.
• 31:59
  It was the kimchi trade.
• 32:00
  Exactly.
• 32:01
  Exactly. And, but in order to, in order to really effectuate that trade, that meant that they had to have liquidity in all these different markets, right? Because Bitcoin, you know, it doesn't sleep, right? 24, 7, 365, the banking hours, Monday through Friday, 8.30 to 5, you know, and, and so they were spending, as they told it, as they shared with Ben, they were spending at least half of their time figuring out how to
• 32:30
  have the appropriate amount of liquidity in Singapore, in London, all over the world,
• 32:38
  just so that they could take advantage of opportunities. And so when Ben came back
• 32:44
  from his field work and said, hey, I think if we enable our customers to transfer money to each
• 32:50
  other, this could really be a huge unlock. And I was skeptical. I'll be the first to admit,
• 32:56
  I was saying, will they really keep the money? I mean, won't it just leave the platform? He said,
• 33:00
  Well, no, because they're going to be trading with each other.
• 33:03
  And so it was a huge unlock.
• 33:05
  We were literally, I think, the first bank in the world to bring the old-fashioned, traditional banking system,
• 33:15
  only open Monday through Friday, into the 24-7, 365 Bitcoin ecosystem to where you could literally push dollars any time of the day or night.
• 33:25
  And there's two other quick distinctions.
• 33:28
  It was U.S. dollars only.
• 33:30
  Okay. So we never touched crypto. You know, we called it the Silvergate Exchange Network, not because it was an exchange, but because it was a network of exchanges. Okay. So we allowed our customers to move dollars and it was push only. And you had to be a client of Silvergate.
• 33:51
  So this was the other beautiful thing is that once you were inside the network, then when
• 34:00
  other customers found out that, oh, I can transfer to Danny on a Saturday night.
• 34:05
  So it became a huge unlock.
• 34:07
  And then it became a business development tool.
• 34:09
  Because if you were interacting, if you're a client with Silvergate and you're interacting
• 34:13
  with a new potential counterparty.
• 34:15
  You own them on the network.
• 34:16
  They would say, hey, do you bank with Silvergate?
• 34:18
  If the answer was no, that would be the first call.
• 34:21
  Recent hardware wallet vulnerabilities have definitely made me rethink my entire security setup, as I'm sure it has for a lot of Bitcoiners.
• 34:27
  And the uncomfortable truth is that no single security product can promise there'll never be a problem, which is exactly why the design matters.
• 34:34
  BitKey is a self-custody hardware wallet that uses three keys created in three separate environments.
• 34:39
  There's one on your phone, one on the BitKey hardware itself, and one on a secure BitKey server.
• 34:44
  Two of those three keys are required to sign any transaction, so a problem isolated to just one key is never enough to move your Bitcoins.
• 34:51
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• 34:56
  The hardware looks great. The app and the user experience is second to none.
• 35:00
  Backing up and restoring your wallet is seamless, and they even have inheritance built in.
• 35:04
  So I really don't think you'd be disappointed.
• 35:06
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• 35:14
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• 35:18
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• 35:21
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• 35:24
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• 35:27
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• 35:31
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• 35:35
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• 35:41
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• 35:46
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• 35:49
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• 35:52
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• 35:55
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• 35:59
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• 36:02
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• 36:04
  That's anchorwatch.com.
• 36:06
  And so get to the end of 2017.
• 36:09
  That's the end of that Bitcoin bull market.
• 36:11
  Going into 2018, 2019, did you see a slowdown in the growth?
• 36:14
  We did.
• 36:15
  Yeah, it wasn't as significant as other downturns
• 36:20
  that we experienced but it definitely slowed down I think one of the things that masked the slowdown a little bit was the fact that because the CEN was new and we were onboarding you know we had a pipeline of clients or prospects who wanted
• 36:35
  to be onboarded and, you know, they would bring in. And even though the market overall was in a
• 36:41
  downturn, we were growing. So we weren't growing as much, but the customer count was growing.
• 36:48
  Deposits fell off a little bit.
• 36:50
  But it was 2018 when I said to the board, we should consider going all in on this.
• 36:59
  And they said, well, what do you mean by all in?
• 37:02
  And I said, well, I mean, this should be our business.
• 37:08
  This should be the strategy.
• 37:10
  This is what will create the most value for shareholders.
• 37:14
  we have something that nobody else is doing um i think signature had maybe launched signet around
• 37:22
  the same time um but you know we we just recognized that it could be really meaningful for us and and
• 37:30
  so at the time we still had four branches but within two years um we were down to one branch
• 37:35
  um you know covet happened obviously a couple years later but um we ended up exiting all of
• 37:42
  other lending activities. We started Bitcoin collateralized lending. We were the first bank,
• 37:47
  I think, to lend against Bitcoin. Best lending I've ever done. And so a lot happened in 2018 and
• 37:54
  19. And tell me what that board conversation was like. Did they get this by this point?
• 37:59
  Obviously, they've seen the deposits grow in a huge way. But did they get going all in on Bitcoin?
• 38:04
  That's very different from it being a part of your business. Yeah, it's a great question. And
• 38:09
  And what I want to say to start with is I had a great board and they were very supportive,
• 38:18
  but there were obviously skeptics.
• 38:21
  We've all heard Michael Saylor talk about his journey.
• 38:26
  But because even going all in at that time didn't mean completely exiting everything.
• 38:34
  The exiting everything else really was driven more by COVID.
• 38:40
  So the going all in in 2018 was really more about making sure that we had the resources,
• 38:50
  recognizing that this was going to be an initiative where we were going to devote
• 38:56
  essentially unlimited resources to the extent that we, I mean, obviously nobody has unlimited
• 39:02
  resources, but to the extent we could raise the capital, um, and that we could build the
• 39:06
  appropriate infrastructure, then, um, you know, we didn't want to be turning away good business.
• 39:12
  Having said that, um, you know, I think at our peak, we had around 15, 1600 clients, all business
• 39:19
  clients, but we had turned away over 10,000 businesses. Um, so there were a lot of companies
• 39:25
  that we said no to, which also gets lost in the story. But we were, you know, if you had an account
• 39:34
  with Silvergate, you were viewed as, you know, you had a good program.
• 39:41
  Yeah. And again, I don't want to jump the gun too much here because this kind of gets into what we'll
• 39:45
  talk about later. But you said you said no to 10,000 businesses. What would be the sort of common
• 39:50
  reason that you would say no to a business? The most common reason, um, literally was, um, a,
• 39:57
  an immature compliance program. So, um, it's a big tell if you've got someone coming to you,
• 40:03
  um, and we ask for an org chart and the, and the founder is the CEO and the chief compliance officer,
• 40:09
  um, you know, but, but then, you know, they got wise to that. And so then they would go out and
• 40:14
  they, and they would maybe, um, you know, hire some third party. But, um, if you're just putting
• 40:20
  enough, you know, if the company's just putting off that responsibility, you know, to some third
• 40:24
  party and that third party has a thousand clients that they're all trying to, you know, build
• 40:28
  compliance programs for. So there were many companies and, you know, there were quite a few
• 40:34
  that did the work to become compliant. And then, you know, so they would come back and they would
• 40:39
  say, well, what do we need to do? And we tell them and, you know, a year later, they'd be back
• 40:44
  and we'd put them through again and some made it.
• 40:48
  Okay.
• 40:48
  And so going into 2019, you go public.
• 40:52
  What was the value when you went public?
• 40:57
  Well, I don't remember what our market cap was.
• 41:01
  The IPO was disappointing.
• 41:04
  We almost didn't get public.
• 41:06
  Okay.
• 41:07
  So, and anybody can go back and look at this.
• 41:09
  I mean, I think we were trying to raise 40 million.
• 41:14
  And we were, I think we tried to price it
• 41:20
  like maybe 13 to 15 bucks a share.
• 41:24
  But when we had done the private placement in 2018,
• 41:28
  we had priced that at 12 bucks a share.
• 41:30
  And so we went public at 12.
• 41:33
  Okay.
• 41:34
  And I don't remember what the market cap was.
• 41:37
  I, it's been so long ago.
• 41:39
  But it was basically almost like, you know, and we actually had to get some investors that would be willing to sell into the IPO, which we weren't originally going to do.
• 41:51
  It was going to be all new capital.
• 41:53
  But the demand just wasn't there.
• 41:55
  So believe it or not, in November 2019, we had a tough time, you know, convincing people.
• 42:04
  And then, you know, three months later, COVID happens.
• 42:08
  the entire world shuts down except for crypto you know and we have the the flash the covid flash
• 42:17
  crash in march but then it's kind of off to the races and you're now sat there as a public company
• 42:21
  much better access to capital and bitcoin's ripping yeah so at this point is it like
• 42:27
  all hands on deck grow grow grow um it it actually took a while um believe it or not so
• 42:33
  And that flash crash, March of 2020, just to give you a little insight.
• 42:41
  So our stock price went from $12 to $8.
• 42:46
  Our book value was like $12.
• 42:51
  And so I was really torn because I had a little bit of money personally in my money market
• 42:58
  account.
• 42:58
  And it's like, OK, well, Bitcoin price went down.
• 43:01
  Silvergate went down.
• 43:02
  and i thought no i am now the ceo of a public company i need to demonstrate and so so i didn't
• 43:08
  but i didn't buy bitcoin i bought silver gate stock um and um i i i got a great buy on it you
• 43:14
  know i paid eight bucks a share for something that you know a year later was you know was um
• 43:19
  was i think we did a secondary offering at 64 bucks a share there you go money where your mouth
• 43:24
  is okay so then talk me through the next year or so through 2020 into 2021 what what was your
• 43:29
  experience at the bank then? Yeah, so we did start growing in 2020. By the end of 2020, I think we
• 43:40
  were, I want to say that we were maybe around two and a half billion in assets.
• 43:51
  Yeah, I'm losing track of the numbers in the years. We might have been up to five
• 43:59
  up to 5 billion by then. But the real growth came in 2021. So just to kind of level set,
• 44:09
  December, so fourth quarter of 2020 is when the growth started ramping up. Now, because we had
• 44:16
  been public long enough, we had been public for just over a year, we qualified for the term of
• 44:26
  in the public markets is a well-known seasoned issuer.
• 44:30
  You might've heard Saylor talk about this,
• 44:32
  a Wixie, as they call it, a well-known seasoned issuer.
• 44:34
  If you've been public for a certain amount of time,
• 44:37
  your market cap's a certain level,
• 44:38
  you've filed all of your SEC filings on a timely basis,
• 44:43
  so you can have more efficient access to capital.
• 44:46
  So we started working on a capital raise in December of 2020
• 44:50
  that we ultimately hit the market with in January of 2021.
• 44:56
  And I think we raised about $200 million.
• 44:59
  And, you know, contrast that with, you know, three years earlier in 2018, when we had done
• 45:07
  that private placement, we raised about $100 million.
• 45:10
  Took us six months running around the country, trying to convince people to invest in this
• 45:15
  little thing at Silvergate, you know, and then three years later, you know, we, you
• 45:19
  know, it takes us about a month to get to line up the bankers and, you know, and we
• 45:24
  raised a couple hundred million dollars. Okay. And so when we talk about sort of the
• 45:29
  regulators as a part of this story, they're going to come into it in a very meaningful way soon.
• 45:34
  When did Choke Point 2.0 first start? When did you start getting more and more scrutiny?
• 45:42
  I've had a lot of time to look back. There's the headlines there and then there's, well,
• 45:50
  you know when can we might maybe identify some things that in hindsight may look like oh you know
• 45:58
  maybe this was it um one of the things that doesn't get talked about a lot so we we spend you know
• 46:05
  silvergate was known for the send the silvergate exchange network um and but um we were also at
• 46:12
  that time working on a stable coin. Okay. Um, it's obviously a big deal right now. Again, I think we
• 46:20
  were, we were early to, to this, but in the beginning of 21 and in the midst of all this growth,
• 46:29
  um, we start having conversations with the DM association. Um, and just to bring everybody up,
• 46:38
  Facebook had announced in, I think it was 2019 was when they announced Libra.
• 46:43
  Libra, yep.
• 46:44
  And there was all kinds of blowback And so Libra goes through a couple of different iterations They go offshore to Switzerland create this thing called DM And they still have a desire to issue a stablecoin obviously
• 47:00
  It was initially going to be a basket of currencies that was going to support it.
• 47:03
  And then it was going to be a dollar only.
• 47:06
  And as often happened back in that time frame, people found their way to our doors.
• 47:15
  because they, you know, as just they're talking to people,
• 47:19
  so well, have you talked to Silvergate yet?
• 47:21
  And what happened in the first quarter of 21
• 47:24
  is some of our tech team was working with their team.
• 47:29
  And the feedback that I was hearing,
• 47:31
  and this was all kind of secondhand from our folks
• 47:34
  that were working in the trenches with them,
• 47:36
  is they said, hey, you know,
• 47:37
  we just accomplished with you guys in three weeks
• 47:40
  what we haven't been able to do
• 47:41
  with these bigger banks in months.
• 47:43
  and um and so we started talking with them about being their launch partner and um we started
• 47:53
  having conversations with a ton of different regulatory agencies and this is all by the way
• 47:59
  anybody that's interested in this should go back and look um because and and i'll i'll finish telling
• 48:05
  the story here um from our perspective for what i can say um and there's a lot that i can't talk
• 48:10
  about, but there was an FT article that was written in early 22. And then David Marcus
• 48:19
  posted something on Twitter. I think that might've been 24. But should go back and look at those to
• 48:26
  kind of, you know, triangulate here on what I'm about to share. But in any event, in the first and
• 48:33
  second quarter of 21, we start working closer and closer with the DM Association. And as we're
• 48:43
  working with them, we end up working with what we discovered was essentially the president's,
• 48:49
  this is the US president's working group on stable coins. Didn't know what it was called at
• 48:55
  the time, but it was regulators from the Fed, who was our primary federal regulator,
• 49:01
  but then also the U.S. Treasury, the CFTC, the SEC.
• 49:06
  I think there might have been OCC in there.
• 49:09
  So we're having lots of conversations with folks from DM,
• 49:13
  folks from Facebook and DM,
• 49:17
  and with all these different regulators.
• 49:19
  And we get to the point in June of 21
• 49:23
  where we're ready to launch pilot.
• 49:26
  And we're all set.
• 49:28
  We're ready to go.
• 49:29
  and we essentially were asked to not launch yet.
• 49:36
  Okay, I can't go into any detail,
• 49:38
  but it was basically what we were told.
• 49:42
  And by the way, what we were told was true,
• 49:44
  which is, hey, their president's working group
• 49:48
  is in the process of issuing a white paper.
• 49:52
  They're doing a study.
• 49:53
  They're going to issue a white paper later this year.
• 49:55
  And we would really prefer if you would wait
• 49:58
  until that guidance was out.
• 49:59
  OK, so of course, being good citizens, you know, we we always tried to, you know, to work with our regulators.
• 50:09
  If if they ask us to hold off, we held off.
• 50:13
  OK, it took so that was late June, November 1st.
• 50:19
  The president's working group report on stable coins is issued in that report.
• 50:26
  It stated that the U.S. government would prefer that stable coins are issued by insured depository institutions.
• 50:39
  They created an acronym, IDIs, insured depository institutions.
• 50:44
  It didn't actually say banks, but we looked at that and said, we're an insured depository institution.
• 50:51
  importantly dm association decide you know recognize we're not an insured depository
• 50:58
  institution so they the dm association made the decision in november of 2021 that they were going
• 51:05
  to um just you know throw in the towel fold on this project um and you know they're they're
• 51:13
  essentially going to sell the technology so um they asked us if we would be interested so we
• 51:19
  participated it was a competitive bidding process um but we had gotten to know them pretty well and
• 51:25
  a lot of the members of the association quite well and so um ultimately we were the successful
• 51:31
  bidder we bought dm we closed that deal and announced it on january 31st of 2022
• 51:36
  and as i look back on that arc and then everything that happened in late 22
• 51:44
  I think there's a link to when we popped up on the radar of the broader regulatory-
• 51:56
  That might have put a target on your back.
• 51:58
  Yeah.
• 51:58
  Because I mean for anyone that not aware I wasn around back then the perception of stablecoins was vastly different to today like i remember when libra first went in front of congress and david market marcus got
• 52:10
  absolutely blasted like they were so anti this idea yeah um okay so that's sort of going through
• 52:17
  2021 2022 everything's really ripping is this when you reach your sort of highest period of growth
• 52:23
  Yeah, I think our peak was, it was definitely the first half of 22, first or second quarter.
• 52:33
  I think on a, you know, and this doesn't get reported because it's intra quarter, but I think, you know, maybe we're at the end of 22, we were 14 and a half billion in assets.
• 52:44
  I don't know if we ever reached 15 billion in 22, but we kind of peak, go up over 15.
• 52:52
  But then by the end of maybe the first quarter, you know, we were back down a little bit.
• 52:56
  But a lot of stuff started happening.
• 52:59
  You know, again, that folks that have been around long enough, you know, you had the Terra Luna thing, you know, you got the three hours capital.
• 53:07
  You got all this stuff that's going on.
• 53:10
  But the send is just clicking away.
• 53:12
  you know, we also had over a billion dollars in loan commitments against Bitcoin. We had about
• 53:22
  700 million outstanding at its peak. That all performed flawlessly, as you would expect when
• 53:29
  you have an over collateralized loan, collateralized by Bitcoin. When you were doing that, this is a bit
• 53:33
  of a tangent, but when you were doing Bitcoin backed loans, what were you doing with the
• 53:36
  Bitcoin that you received? So we never tested ourselves. What we had done was we had partnered
• 53:43
  with custodians. I think our largest partner in that was NIDIG, but we essentially had five
• 53:52
  different custodial partners. And the reason we did that was primarily because we understood that
• 54:00
  if an individual who owned Bitcoin, and I say an individual, but this was a business initiative,
• 54:06
  so it was businesses only, but a business had already gone through, and let's use Sailor as
• 54:12
  an example, because it's commonly known that MicroStrategy was one of our borrowers.
• 54:17
  Well, if they had done all of the work and decided that, hey, I want to custody my Bitcoin with
• 54:22
  this entity, then we weren't going to make them move that. So, so we, we established relationships
• 54:30
  with NYDIG, with Fidelity, with Coinbase Custody, Anchorage, and indirectly with BitGo,
• 54:42
  it was with Bitstamp, but I think they used BitGo for their custody. So, so we basically,
• 54:47
  any of the institutional grade custodians at the time, if you wanted to borrow against your Bitcoin
• 54:52
  and you held it there, then we would enter into, in Wall Street parlance, it's called a tri-party
• 54:59
  agreement. Very common type of structure where you've got three parties, you've got the lender,
• 55:07
  the borrower, the custodian. And that's how we did it. And we monitored the collateral coverage
• 55:14
  24-7. And the beautiful thing is, because it was over collateralized, we didn't have the problems
• 55:22
  that the under collateralized lenders had. If one of our borrowers got into trouble,
• 55:30
  if they were having liquidity challenges, they wanted access to the liquidity that was tied up
• 55:36
  in their loan with us, right? Because if they were over collateralized, then if they paid that off,
• 55:42
  then they could free up some incremental liquidity yeah and and that's exactly you know what what we
• 55:50
  experienced you know during that time frame okay so in 2022 who are your biggest clients
• 55:56
  coinbase and circle were um and we though they were named publicly you know they were named in
• 56:04
  our filings. Um, the other, you know, larger, large clients that we had at the time, um, you
• 56:13
  know, we, we, we banked all of them. Right. So, um, so, uh, Kraken, Bitstamp, um, FTX, obviously.
• 56:24
  Um, and, um, you know, there was a narrative out there that, that FTX was the largest. They were
• 56:30
  not. You know, there were at least three customers that were larger than them.
• 56:35
  But they were meaningful.
• 56:36
  They were certainly meaningful. And then on the lending side, some of those same clients were also,
• 56:47
  you know, they're on both sides of the balance sheet. And so, you know, it was a great business.
• 56:55
  I mean, you'd built this to be the cornerstone of the Bitcoin industry. Like, this was who everyone
• 57:00
  banked with. Amazingly impressive. And so in terms of the businesses that you banked, I'm obviously
• 57:07
  asking about these for a reason and we're getting to that, but obviously FTX, were you banking with
• 57:12
  them Alameda as well And was it like the three hours capital like all the people that end up getting caught up in this sort of crypto contagion Sure Okay So um yeah so let let um let go through the list Um um so we banked Genesis which uh filed bankruptcy Um
• 57:30
  we banked BlockFi, which filed bankruptcy. But my recollection is that Alameda was,
• 57:36
  was one of the earlier, you know, we were, we talked about like the earlier days. Um,
• 57:41
  You talked about the kimchi, you know, that whole thing.
• 57:45
  Alameda was one of those customers that was using the sand to, you know, to buy and sell
• 57:51
  Bitcoin all over the world.
• 57:52
  It wasn't until later that they formed FTX and FTX ultimately became a customer.
• 58:02
  So yeah, so FTX, Alameda, but then yes.
• 58:05
  Now, three hours capital, I don't think they were a client.
• 58:09
  celsius was not a client um or if they were they were in the very early early stages but we didn't
• 58:15
  have any exposure to celsius at all when you know it was they were one of the other ones that filed
• 58:19
  bankruptcy during that time frame okay so so during 2022 obviously we know what eventually
• 58:24
  happened to ftx was there any period where that account started looking risky
• 58:28
  uh not to my recollection not until all of a sudden you know they were experiencing a run
• 58:37
  And if you remember, for a brief period of time in that summer time, they were actively acquiring, or at least attempting to acquire, some of the companies that were in trouble.
• 58:55
  As an example, BlockFi.
• 58:57
  They were seen as the savior of crypto.
• 58:59
  Exactly.
• 59:00
  Okay.
• 59:00
  Okay. And so when, let's get to sort of the juicy part, when it did become clear very quickly
• 59:06
  that FTX were not what they said they were going to be, what was happening internally
• 59:11
  at the bank when you saw that happening?
• 59:16
  So we certainly didn't initially, I don't recall seeing any, you know, like regulatory
• 59:25
  compliance warning signs. I think what we saw happening was deposits went down rapidly,
• 59:37
  and then we started seeing other deposit flight. And so this all happened pretty quickly. And it
• 59:46
  started happening, I think, the second week in November. And, you know, there was something that
• 59:55
  had been posted on Twitter about their balance sheet, you know, FTX's balance sheet or something
• 59:59
  like that. And then all of a sudden, you know, their deposits, and I don't even remember
• 1:00:07
  specifically being made aware of the FTX deposit specifically. It was more like, okay, well,
• 1:00:16
  deposits are going down and then all of a sudden the run accelerated and within a matter of a couple
• 1:00:23
  of weeks it was you know i mean we experienced the biggest you know as a percentage of deposits
• 1:00:30
  the biggest bank run in history this was the biggest bank run history and i think
• 1:00:34
  the total was 70 percent of deposits we were drawn that's right okay i there's i've got so
• 1:00:40
  many questions on that but firstly when this was happening when when it got to sort of crunch time
• 1:00:45
  when you're at 40, 50% deposit being withdrawn
• 1:00:47
  and it's not slowing down.
• 1:00:50
  What's happening in the bank?
• 1:00:51
  Is everyone panicking?
• 1:00:52
  Or did you know that you were robust enough to survive this?
• 1:00:55
  From a liquidity standpoint,
• 1:00:58
  we knew that we were going to survive that.
• 1:01:02
  What we were beginning to question was,
• 1:01:05
  okay, where's the bottom of this?
• 1:01:08
  It's really ironic that,
• 1:01:11
  I'm going to share something with you
• 1:01:14
  that my fellow Silvergate team members will remember.
• 1:01:18
  But keep in mind, this is the tail end of COVID.
• 1:01:21
  We had experienced all this growth during COVID.
• 1:01:24
  We were a fully remote bank.
• 1:01:26
  Okay, so, and we had in that second week of November,
• 1:01:32
  we had a gathering of our employees.
• 1:01:36
  And, you know, obviously people still need to run the bank.
• 1:01:38
  So about half of the employees
• 1:01:40
  had gotten together in San Diego.
• 1:01:41
  and we were essentially having one of our first get togethers post-COVID and so we had a series
• 1:01:50
  of events and you know people were working but then we were also you know getting together and
• 1:01:55
  this deposit run starts heating up and I remember having a so having a conversation with our team
• 1:02:03
  folks that were there in the room and and the question came up you know about the deposit run
• 1:02:11
  I mean, we were very transparent, you know,
• 1:02:13
  and internally everybody knew every day
• 1:02:15
  what the deposit levels were, et cetera.
• 1:02:17
  And I made a comment that ended up being somewhat prophetic.
• 1:02:21
  I didn't know it at the time,
• 1:02:23
  but because of the way we had structured the balance sheet,
• 1:02:26
  I said to our team, I said,
• 1:02:29
  if all the deposits leave, we will handle every withdrawal.
• 1:02:35
  And then the next question we're going to have to do
• 1:02:38
  is we're going to look around to each other and say,
• 1:02:39
  okay, well, what do we do now?
• 1:02:42
  And we ended up living that four months later.
• 1:02:46
  But we knew that we had the liquidity
• 1:02:49
  to satisfy every withdrawal.
• 1:02:52
  So you have the liquidity to satisfy the withdrawals,
• 1:02:54
  but what does that actually mean for the bank?
• 1:02:56
  Like, even if you can cover withdrawals,
• 1:02:58
  can the bank continue to survive?
• 1:02:59
  Because I imagine, you know, shareholders, investors get hit really hard in this, but you're going to make all the depositors hold.
• 1:03:06
  Yes. Yeah. So so it's a great distinction to make because we had to.
• 1:03:14
  Initially, we didn't realize we were going to sell our entire securities portfolio. Right.
• 1:03:19
  So the way we had structured the balance sheet was instead of lending out those deposits, we were keeping a large investment securities portfolio.
• 1:03:30
  But keep in mind also that all that growth happened during a time when interest rates were zero because this was COVID.
• 1:03:38
  Yeah. Right. So 2020, 2021 and first part of 22 until I think the Fed raised rates for the first time in March of 22.
• 1:03:45
  But all of that growth happened when interest rates were zero.
• 1:03:49
  which meant that we had to invest in something because as you're growing, you have to build more infrastructure.
• 1:03:56
  You have to hire more people. How do you pay for those folks? Well, you have to earn revenue somehow.
• 1:04:01
  So we were building an investment portfolio that would be short duration, but taking some maturity, you know,
• 1:04:11
  transformation, you know, or, you know, that, that trying to go out on the yield curve a little bit so that we could generate enough yield
• 1:04:18
  to pay for all the infrastructure, right?
• 1:04:20
  So that's the painful part in the unwind
• 1:04:23
  because once we realized
• 1:04:25
  that we have to sell the securities portfolio,
• 1:04:26
  we did take losses.
• 1:04:27
  Now, if we didn't have enough equity to cover the losses,
• 1:04:31
  we would have failed, okay?
• 1:04:34
  So the way we built the balance sheet
• 1:04:36
  was everything that we had was pleasurable to borrow against.
• 1:04:40
  So the first thing you do when you have a deposit run
• 1:04:43
  is you borrow against your investments.
• 1:04:45
  other banks may borrow against their loans but ultimately got to pay those borrowings back
• 1:04:50
  it became really clear early on that that we were that this was going to be a while okay this was
• 1:04:59
  not going to be you know as we're talking with our clients in the aftermath of FTX it's going to take
• 1:05:05
  probably months not weeks for our deposits to come back which means we're going to have to pay down
• 1:05:12
  these borrowings we're going to have to sell some securities we didn't realize we're going to sell
• 1:05:15
  them all but that's what we start doing so so we borrowed from the fed we borrowed from the federal
• 1:05:19
  home loan bank and then we start selling securities to pay them off um and um you know ultimately
• 1:05:26
  then as we get into march um you know we made the decision to wind down completely but uh we that was
• 1:05:32
  not that was not anywhere in our you know in our thinking in november and december of of 2022 you
• 1:05:40
  you survived this 70% deposit bank run.
• 1:05:45
  Is there any part of you at that point that thinks, okay,
• 1:05:47
  we can rebuild from here. We've taken a huge hit,
• 1:05:49
  but there is a possibility that there's a hundred percent there, there was,
• 1:05:53
  there was no doubt in my mind that we were,
• 1:05:56
  that we were going to continue to serve the industry. The,
• 1:06:01
  the kind of conversations we were having in December was okay,
• 1:06:06
  because we have, we've had to sell at the time.
• 1:06:09
  So we had an internal initiative.
• 1:06:11
  Just to tell you some of the things that come back flooding into my mind.
• 1:06:15
  We have to sell 5 billion of securities in five weeks.
• 1:06:18
  Okay.
• 1:06:18
  So it was five in five.
• 1:06:19
  But this was Thanksgiving to New Year's.
• 1:06:24
  And I knew from my banking experience that we really didn't have until New Year's because
• 1:06:29
  the entire market shuts down for, you know, which meant we're saying five in five, but
• 1:06:34
  we really got to do 5 billion in three weeks.
• 1:06:36
  Okay.
• 1:06:37
  So we sold five billion of securities in three weeks, paid off the discount window at the Fed and and took, you know, 700 million in losses.
• 1:06:46
  I think that I think the losses on the securities portfolio was seven was 700 million.
• 1:06:50
  And we had over a billion in equity, but it was a huge hit.
• 1:06:55
  So then the question becomes, OK, now we've just burned through a ton of capital, which means if it all comes flooding back, we can't we don't have enough capital.
• 1:07:06
  service at all. Okay. So we start talking about doing a RIF, a reduction in force, right? So this
• 1:07:12
  is, you know, Merry Christmas. You know, but in the first two weeks of December, we were putting
• 1:07:16
  together financial projections for what would it look like, you know, to be on the other side of
• 1:07:22
  this. And the beautiful thing is that internally we were saying, hey, you know, we were a $5 billion
• 1:07:27
  bank two years ago. We know exactly what it takes to run that. It doesn't take as much as what we
• 1:07:32
  have right now um and so by the by january 5th so we we actually did a press release on january 5th um and and we announced were laying off 40 of our staff We told the entire market exactly what happened
• 1:07:48
  You know, what was the deposit run?
• 1:07:50
  What were the losses from the sales of securities?
• 1:07:53
  But good news, you know, we're still here.
• 1:07:56
  We're servicing the industry.
• 1:07:58
  And we were, you know, we didn't have to rebuild anything.
• 1:08:01
  We actually had to cut, right?
• 1:08:03
  We had to make some strategic decisions to say, okay, we're not going to be able to do this correspondent banking initiative where we were establishing relationships with banks all over the world.
• 1:08:15
  So there were things that we were trimming back on.
• 1:08:18
  And one of the things that we were also focusing on was, okay, if you're an exchange and you've issued your own token, again, this doesn't exist anymore.
• 1:08:27
  But all these exchanges, you know, had issued their own token so that they could, you know, offer marketing incentives or whatever.
• 1:08:35
  But that was a big red flag after what happened with FTX and their token.
• 1:08:40
  And so it's like, OK, well, if they've issued their own token, then we're going to have to go in and take a hard look and we might be firing some customers.
• 1:08:46
  And so we were going to essentially be a leaner operation, but we were going to still be in business.
• 1:08:52
  So the most impressive thing of this entire story, like one, it's very impressive that you built a bank from 500 million deposits to 15 billion.
• 1:08:58
  That's incredible. But it's even more impressive that you survived a 70 percent deposit withdrawal bank run.
• 1:09:04
  Is there any other bank in the world that could have done that?
• 1:09:08
  I don't think so. And I've got to really pause here and give credit to our team.
• 1:09:14
  Um, the team at Silvergate, I mean, they were impressive and, uh, you know, and everybody,
• 1:09:22
  you know, our, our customers loved us, but going through this, you, you really, you, you know,
• 1:09:28
  I mean, you show your metal, right. You know, people, um, and, and our team, had we not
• 1:09:34
  structured things the way we did, we wouldn't have survived if we weren't there, you know,
• 1:09:38
  and people weren't showing up when they were needed. And then dealing with the onslaught of
• 1:09:45
  the regulatory attention, the customers, you know, it was literally, and, you know, we were
• 1:09:51
  essentially, we had instances of being debanked ourselves. You know, I'm not going to, you know,
• 1:09:56
  throw stones at anybody, but there were counterparties that were trying to distance themselves
• 1:10:01
  from us that we relied on to provide services to our clients. So it was an incredibly stressful
• 1:10:08
  time and our team um just just you know they showed up every day and um i it's the thing that
• 1:10:14
  i miss the most is is working with all the incredible people at silver game yeah um so
• 1:10:21
  start of 2023 tail between the legs you've been hit really hard but you still have this plan to
• 1:10:26
  survive what happened in the next three months until march when you decided to close down how
• 1:10:30
  did that thinking change? Yeah. So on January 3rd, the banking regulators issued an interagency
• 1:10:40
  letter, a joint statement. And when those are issued, it's all of them together. So it's the Fed,
• 1:10:48
  the FDIC, the OCC. And if you go back and look at that letter on January 3rd,
• 1:10:55
  it looks like it was written for Silvergate and maybe Signature.
• 1:10:59
  I mean, but they were just citing all these liquidity risks
• 1:11:04
  about concentrations in this industry, et cetera, banking crypto.
• 1:11:11
  But we looked at that and said, okay, well, yeah, these are all right,
• 1:11:17
  but we satisfied all of these, right?
• 1:11:18
  We did this, okay?
• 1:11:20
  So it felt a little bit at the time, and again,
• 1:11:24
  And hindsight is 20-20 only if you look and learn.
• 1:11:28
  But at the time, it just felt a little bit, you know, kind of like CYA.
• 1:11:34
  Okay.
• 1:11:34
  It's like, you know, the regulators are, you know, pointing out the obvious.
• 1:11:39
  But we survived it.
• 1:11:42
  Okay.
• 1:11:43
  It was really the second letter that they issued.
• 1:11:47
  And I don't remember the date, but it was late February.
• 1:11:50
  Okay.
• 1:11:50
  So there's a second letter that gets issued, a joint letter toward the end of February, which again speaks to the concentration of banking the crypto industry.
• 1:12:03
  And so that letter, and then you go back and you look at the other one, and then the feedback that we're getting, which I unfortunately can't talk about,
• 1:12:12
  it became really clear that if we were going to continue to bank the crypto industry, and I'll use crypto in this context,
• 1:12:23
  it was going to have to be a much smaller initiative inside of a more diversified bank.
• 1:12:32
  And this was the thing that I really was, you know, just struggling with from the perspective of, you know, and I at the time when we were when we were deliberating this internally at Silvergate.
• 1:12:47
  Silicon Valley and Signature hadn't failed yet.
• 1:12:49
  Right So this was I mean I was really struggling with it OK wait a second We being told that we have to be more diversified But if we had been more diversified
• 1:13:02
  we likely wouldn't have survived. Because, you know, now some people say, well, you would, you
• 1:13:07
  know, we just have two lines of business. But that's incredibly inefficient. And one of the
• 1:13:12
  reasons we did focus was because of the distraction of having two different types of, two big
• 1:13:18
  different types of business with different types of risks. And so the focus that we had was,
• 1:13:26
  I believe, and I still believe this to this day, is what allowed us to survive.
• 1:13:30
  And we were being told that we were going to have to diversify. And then you just have real
• 1:13:34
  challenges. It's like, okay, well, wait a second. What percentage? And there's stuff out there in
• 1:13:39
  the public that says, oh, well, the regulators were telling banks that it can't be more than 15%.
• 1:13:43
  percent. Um, I don't know that I ever heard a specific percentage. I started out, well,
• 1:13:50
  what if it's 50, 50, you know, trying to try to, you know, um, and, um, we just got to the point
• 1:13:57
  where it's like, okay, this is, this is untenable. We, we are not going to our investors, you know,
• 1:14:03
  we had raised over a billion dollars in capital by this time. Um, unfortunately burned through a
• 1:14:07
  chunk of it, you know, through this, the, you know, surviving the run. But it's like our investors
• 1:14:14
  did not invest in a, you know, diversified community bank. And so we started having,
• 1:14:21
  you know, in early March, it, you know, the focus became, okay, well, what,
• 1:14:26
  what would it look like if we actually wound down the bank? And again, you know, Silvergate was
• 1:14:32
  always on the cutting edge. Um, there aren't many banks that, that actually choose to, um,
• 1:14:37
  voluntarily liquidate. And so we had to talk to the regulators about what would that look like?
• 1:14:41
  Um, but we felt like that was the best way to preserve capital, um, for our investors,
• 1:14:48
  you know, cause the goal was, okay, we've been all, we've given all of the depositors their money
• 1:14:52
  back. Let's try to give our, as much of the money back to investors as we can. Um, and you know,
• 1:15:00
  we'll just move on.
• 1:15:02
  So earlier you said you made the decision to wind down the bank.
• 1:15:06
  Do you feel like you had a decision you could make or were you forced into that decision?
• 1:15:11
  It was certainly our decision to make.
• 1:15:15
  We were not going to be permitted to run a bank focused on the Bitcoin or the crypto market.
• 1:15:24
  I will tell you one, being a Bitcoiner myself, we were looking for a way to say, okay, well,
• 1:15:36
  can we create a more focused initiative inside the bank that just focuses on Bitcoin?
• 1:15:43
  The only digital asset, the only cryptocurrency we ever lent against was Bitcoin.
• 1:15:50
  And it's the only one I ever would.
• 1:15:52
  And so it's like, okay, well, can we have a Bitcoin collateralized lending initiative, maybe have a handful of Bitcoin only companies, maybe some of the best exchanges that even if they're dealing with some other tokens, but can we do that?
• 1:16:07
  But then it was like, okay, well, what is the rest of the bank going to look like?
• 1:16:11
  And none of that was appealing.
• 1:16:14
  And so the bottom line is, yes, we made the decision.
• 1:16:20
  It was our decision to make.
• 1:16:21
  And it was important.
• 1:16:23
  We wanted to keep control.
• 1:16:24
  We felt like it was important that we kept control of the process, right?
• 1:16:29
  And so the responsible thing to do at that point was to say, okay, well, if we're not
• 1:16:34
  going to be permitted to run the business the way we believe it should be run, then we should give
• 1:16:41
  the money back to our investors. Do you think that pressure to run a diversified bank was
• 1:16:45
  was a was a was was there incentive in that to protect depositors, protect investors,
• 1:16:53
  or was it to cut off Bitcoin, crypto from the banking industry?
• 1:16:58
  By process of elimination. And I don't you know, it's hard to know what what people's motives are.
• 1:17:04
  um you there's no way you can argue you that it was to protect depositors because we did that
• 1:17:10
  okay um there i will tell you um i don't believe there was any um concern for investors um and um
• 1:17:21
  this is where i'll you know i'll just say even by the fact that after we wound down um in working
• 1:17:29
  through some of the wind down process you know some of the the regulatory fines that that the
• 1:17:34
  board agreed to in order to just get the thing done, that money came right out of shareholder
• 1:17:41
  pocket.
• 1:17:41
  So there was no concern for investors.
• 1:17:44
  You know, and so by definition, you know, when you give me the three options, I believe,
• 1:17:51
  and I want to be careful here too, because we had, I was with Silvergate for 14 and a
• 1:17:57
  half years.
• 1:17:58
  I worked with the regulatory agencies and I had a 45 year banking career Okay I believe I still to this day have great relationships with the Federal Reserve regulators out of the San Francisco regional office the California State
• 1:18:16
  Banking Department. You know, these are people that you run into. You know, they are local,
• 1:18:23
  right? And I mean, you run into some of them, you know, in town, right? I mean, they're normal
• 1:18:30
  people trying to do a job. Okay. Um, um, this was not driven by them. This was driven by a decision
• 1:18:38
  in, in Washington, DC that, um, this industry, um, should not be banked. And that's what I believe.
• 1:18:47
  Um, that's what we experienced and, um, you know, and, and that's, that's, that's how it ended.
• 1:18:54
  And so after you wind down the bank, it's only a month or two later that we see, uh, signature
• 1:18:59
  banks silicon valley bank go through their period of stress when you watch that and then watch the
• 1:19:06
  regulators reaction to that what were you thinking yeah so i i want to um correct something that you
• 1:19:13
  just said there because this is really important and we've been going a long time danny but
• 1:19:17
  it wasn't a it wasn't months or weeks it was days okay we announced on wednesday march 8th
• 1:19:24
  that we were winding down. Two days later on Friday, March 10th, Silicon Valley Bank failed.
• 1:19:33
  Two days later on Sunday, March 12th, Signature Bank has taken over on a Sunday.
• 1:19:41
  That doesn't happen. So some people have speculated that our announcement that we're
• 1:19:47
  winding down was a contributing factor to Silicon Valley Bank's failure. I think their CEO
• 1:19:56
  said something to that effect in congressional testimony a month or so later. And so you really
• 1:20:04
  have to ask the question, and someone in Washington, D.C. should be asking the question,
• 1:20:09
  you know, was the announcement that Silvergate made that they're winding down,
• 1:20:14
  did that contribute to silicon valley bank's failure to the run-on silicon valley bank that
• 1:20:20
  caused the failure and then to this systemic issue that they were trying to you know to to
• 1:20:26
  ward off by taking over signature bank on a sunday so um yeah i mean it it felt very much like it yeah
• 1:20:34
  i i couldn't believe it i mean i we i was sitting there on on sunday afternoon and i got a text
• 1:20:40
  message from one of my teammates saying, hey, Signature Bank just went down. I said,
• 1:20:45
  on Sunday? When has that ever happened? You know, so. So like from the outside looking in,
• 1:20:51
  this looks like the administration, the Biden administration, the regulators have taken out
• 1:20:56
  the sort of key cornerstone banks for the Bitcoin crypto industry. And then I don't know the exact
• 1:21:01
  timeframe, but shortly afterwards, the BTFP program is brought in to try and sort of stabilize
• 1:21:07
  That same weekend, it was either Sunday night or Monday morning that they announced the bank term funding program, the BTFP, which, by the way, if that had existed for us, we wouldn't have had to sell the securities.
• 1:21:22
  we wouldn't have to take those losses. So we, you know, just like we required our borrowers
• 1:21:28
  to over pledge, to pledge more Bitcoin, to cover their loans, we were pledging our securities
• 1:21:34
  in excess. And we had to sell those, you know, and, you know, those, those other banks didn't.
• 1:21:41
  So I don't want to get too far out on the conspiratorial thing here, but
• 1:21:44
  this looks like they've taken out the Bitcoin banking industry. They're then trying to shore
• 1:21:48
  up every other bank job done do you think that was the whole game plan here uh it certainly could
• 1:21:54
  have had that that effect um i do i do remember um being questioned as to you know we had we had
• 1:22:02
  talked about how um silvergate was like a crypto siffy a siffy bank sifi systemically important
• 1:22:10
  financial institution um you know that's what these too big to fail banks are that they're
• 1:22:14
  they're called SIFIs. Well, we had joked about how, well, Silvergate's like a crypto SIFI.
• 1:22:20
  And obviously it wasn't the case because, you know, we wound down and the industry kept on going.
• 1:22:30
  So what's your mindset at this point? Like straight after this has happened,
• 1:22:34
  how are you doing? Like today or back then? No, back then. Back then.
• 1:22:38
  And my focus became, you know, winding down the bank and, you know, something I had never
• 1:22:46
  done.
• 1:22:46
  Right.
• 1:22:47
  It's like I've done all these other things in my career.
• 1:22:49
  What does this look like?
• 1:22:51
  And so at the time, we still had, you know, we still had some Bitcoin collateralized loans
• 1:22:56
  that we needed to work through.
• 1:23:00
  And so I just shifted my focus.
• 1:23:03
  Right.
• 1:23:04
  It was, OK, let's do this and do it in an honorable way.
• 1:23:08
  let's try to preserve as much equity as we can for our investors and get to the other side of this.
• 1:23:15
  Do you feel like the regulators treated you in an unlawful way?
• 1:23:19
  I believe that the way that the attention that the industry got was, yeah, was potentially unlawful.
• 1:23:32
  Yeah, I don't know.
• 1:23:36
  It's hard to answer because, you know, a lot of this stuff is, it's guidance.
• 1:23:47
  It's not put in writing.
• 1:23:49
  um and you have to kind of try to figure out okay where are we going to land on this um and so you
• 1:23:58
  know one one argument is well hey you guys made the decision to wind down um you know you being
• 1:24:03
  silvergate um you know but it's it's like okay well what precipitated that you know what were
• 1:24:08
  the things that and you know that's that's going to be for other people to figure out um you know
• 1:24:14
  it's, um, we, I think we did everything that, you know, we obviously did everything we could
• 1:24:20
  to take care of our customers. Um, cause without customers, you don't have a business. Um, and then
• 1:24:26
  we did everything in our power to return as much money as we could to our investors. Um, you know,
• 1:24:32
  it was really sad. You know, I talked about our team, you know, we had almost 500 employees. Um,
• 1:24:36
  It was, you know, probably that was the hardest thing.
• 1:24:41
  And as the CEO, I felt responsible.
• 1:24:44
  You know, I felt responsible for those folks
• 1:24:47
  and their families.
• 1:24:48
  And, you know, so I mean, it was an incredibly difficult time.
• 1:24:51
  But I wasn't the only one.
• 1:24:52
  I mean, you know, I mean, the board of directors.
• 1:24:55
  You asked earlier about the board when we made the decision to go all in The board you know they stood up and they continued and they acted honorably and all the way to the bitter end You know something like this
• 1:25:11
  it would be very easy to people to start pointing fingers and, you know, hey, you know, we need
• 1:25:16
  someone to take the fall. It's like, hey, we're in this together. We made this decision together.
• 1:25:20
  We're going to wind it down together. I actually left in August of 23. So, you know, within a few
• 1:25:26
  months, we had done every, I had done everything that I could do. Um, and, and we talked about,
• 1:25:31
  well, should I stay on the board or should I leave? But as chief executive officer, there was nothing
• 1:25:35
  to execute, um, you know, and, um, the board could, you know, absolutely work with the regulators and
• 1:25:42
  the lawyers and all that stuff to wind it down. And, and so I, I left, um, in August of 23 and
• 1:25:48
  the board spent another, you know, couple of years, um, you know, with the wind down that it all just
• 1:25:53
  wrapped up actually in in um march of this year actually with the you know with the final chapter
• 1:25:59
  is is there anything when you look back you think we should have done this differently
• 1:26:04
  um i i've had a lot of time to think you know there there are things that i wish we would have
• 1:26:10
  done differently i don't know when i put myself back in that position at that time i don't know
• 1:26:17
  if i would have made a different decision the biggest one is if we wouldn't have pursued dm
• 1:26:22
  I wonder whether we would have ever, you know, we would have gotten up on the, you know, the radar of the regulatory apparatus, the political apparatus, I should say, in in Washington, D.C.
• 1:26:34
  You know we obviously we were still the the bank the crypto bank per se But I think I think we probably got on the radar a lot earlier because of that you know because of the stablecoin initiative Yeah from hearing the story it certainly sounds like that when the
• 1:26:51
  target may have been put on your back. Yeah yeah and in hindsight the only other thing I will say
• 1:26:57
  you know when you ask me are there other things you know obviously I wish we would have had more
• 1:27:02
  cash, you know, more cash, less securities. Um, but you know, I'm sure the folks at Signature and
• 1:27:09
  Silicon Valley, you know, you know, and first Republic, they're probably, you know, looking
• 1:27:13
  back at, you know, their own balance sheets. So those are business decisions that you make at the
• 1:27:19
  time you make the best decision that you can. And, you know, then you figure it out as you go.
• 1:27:23
  This is all wrapped up in March this year. Um, how are you doing now with a little bit of distance
• 1:27:28
  from it? Yeah, it's, you know, the distance from all of the flurry of activity, obviously,
• 1:27:36
  you know, it's been three years. I can't believe it's been that long. You know, it's been,
• 1:27:39
  I mean, next month, it'll be four years since the run on the bank. You know, I mean,
• 1:27:44
  it's incredible how much time has gone by in one sense. On the other hand, there was a lot of legal
• 1:27:49
  stuff that continued to churn through because, you know, there were all kinds of lawsuits and,
• 1:27:54
  you know, stuff that I had to deal with, I and others at the bank had to deal with.
• 1:27:57
  So in some ways, it's way in the past.
• 1:28:01
  In some ways, it's like, well, just a few months ago, I was talking with lawyers about stuff.
• 1:28:05
  So I will tell you the one thing the one takeaway that I like to leave everybody with is I have never been more convinced that the world needs Bitcoin than I became convinced going through this process I did not know when I first was looking at Bitcoin and these questions you know with Bitcoin you could be your own bank Well having been a career
• 1:28:32
  banker, you know, how does that work? And, you know, do we really need to be our own bank? Well,
• 1:28:38
  I can tell you, I was personally debanked during this process. I'm not going to name names, but
• 1:28:43
  there was a financial institution that where I got one of those letters, you know, and so to
• 1:28:50
  have a um a decentralized trustless um you know sovereign money that can be used all over the
• 1:29:01
  world um censorship resistant i i i mean i became a more hardcore bitcoiner in march of 23 and and
• 1:29:12
  it's i've i've not looked back you know i mean now um i don't own as much bitcoin as i wish i i did
• 1:29:19
  I nearly as much, you know, I went down with the ship with Silvergate.
• 1:29:23
  I have a significant number of shares in Silvergate stock that, you know, in hindsight,
• 1:29:29
  I wish I would have taken a little off the table and bought Bitcoin.
• 1:29:32
  But I was all in, you know, I mean, and I think that's the way it should be.
• 1:29:36
  I love it.
• 1:29:37
  I think that's the perfect place to end the show.
• 1:29:39
  But thank you for doing this.
• 1:29:40
  I'm very glad we managed to tell this story.
• 1:29:42
  Yeah, I really appreciate it, Danny.
• 1:29:44
  Thank you.
• 1:29:44
  And thank you for your support.
• 1:29:45
  Of course.
• 1:29:46
  Of course. Alan Lane, thank you so much.
• 1:29:49
  Thank you.