The Blockchain Interviews with Dan Weiskopf: Alan Lane | ETF Trends

Intro Vocals [00:00:01] You’re watching The Blockchain Interviews, hosted by Dan Weiskopf. Each episode features interviews with leading industry experts so that viewers can have a deeper understanding of today’s quickly evolving block chain marketplace.

Dan Weiskopf [00:00:21] Alan Lane, thank you so much for joining me today in the blockchain CEO interview series. I think it was late 2019 when we started doing research on your company, and I think it was a very misunderstood bank trading at a discount to book value at the time. And today I look at it and you seem to have taken the world by storm. We’re super happy with what you’ve created. And I think often you’re not so much just a bank, but you’re a financial service provider and a very scalable business model. And we appreciate that. And I was frankly amazed when I saw almost a quarter of a trillion dollars that was running through your system. So thanks very much for being on the call with us. Take us a little bit through the road traveled as a CEO of this bank since 2008, if you would. And why you called it Silvergate Bank, by the way.

Alan Lane [00:01:36] Sure. Dan, it’s great to be here. Thank you for the opportunity. And so I can’t take any credit for the name. The name Silvergate already existed when I joined the company back in December of 2008. Silvergate has actually been in existence since the late 80s. It started as a thrift and loan in San Diego County and for several years just operated as kind of a wholesale finance company providing real estate finance transactions to the local market. And when I joined Silvergate in December of 2008, it was still an industrial loan company, a thrift and loan, with the name Silvergate Bank. We had a little under 40 employees and a little under 300 million in total assets. So it’s a very small platform. But importantly, Silvergate was clean, didn’t have any credit quality issues at all. And this was at the height of the housing crisis. The banks had just started to fail in 2008. The summer of 2008, I think is when the first failure happened through that housing crisis. And I was looking for a clean platform to join. The bank I had been working with previously had sold a couple of years earlier, and Silvergate was just really attractive as a platform to build upon. And it’s very coincidental and somewhat providential, I think, that unbeknownst to me, around the same time I was joining Silvergate, the Genesis block of Bitcoin was launched literally about a month after I joined Silverglate. I had no idea, I wasn’t–I’m not a cypherpunk, I wasn’t into crypto currencies, they weren’t even on my radar. But it is, you know, looking back on it, it is somewhat interesting to know that I joined Silvergate at the same time the Bitcoin was, you know, was being born. And it took several years for me to discover it and happy to, you know, to go on and talk about that. But I would like to–I certainly want to go wherever you want to take this conversation.

Dan Weiskopf [00:03:52] Thank you. Thank you very much. Listen, I definitely–everybody seems to have the crypto epiphany or the blockchain epiphany. I’d love to learn a little bit about yours.

Alan Lane [00:04:03] Yeah, so it’s interesting that we came at this purely from the perspective of an opportunity to generate deposits from businesses, so when I joined Silverglate, within a couple of months, we had converted the charter to a commercial bank and I have a business banking background. And so the thought was, well, let’s turn Silverglate into a business bank. But the real opportunities in 2009, ’10, ’11 weren’t really in traditional business banking, but they were really more on the residential lending side because of the fact that that’s where all of the pain was in the financial system, if you will. Oftentimes, these credit crises, they create opportunities. And so even though I had joined Silverglate to generate–to create a business bank, we really started going after the residential market in 2009 because a lot of other banks were struggling with their own residential assets that they had on the books. And so the long and short of it is we were growing rather nicely for a small bank and by the end of 2013, we had more than doubled the bank in size. We were around 700 million in assets. And so that was the first five years, just kind of growing a traditional bank focused on residential lending. But we were struggling to grow our deposits, our funding sources, at the same level that we were growing our loans. And that’s really the intersection of where I discovered Bitcoin. And it was an intellectual curiosity on my part. I was reading about this thing called Bitcoin at a popular level, and I thought it was fascinating but didn’t really understand it, and, but, just was discovering that there were companies that were being formed to provide services to the Bitcoin industry. And those companies were businesses, and we were trying to be a business bank, and they were raising venture capital, so they had deposits. And at the same time they were struggling to find and maintain bank accounts because a lot of bankers didn’t really understand what this Bitcoin thing was. And most of these companies were money service businesses, money transmitters, companies like Coinbase–is a great example of an early company that we discovered as they were being born and they were raising venture money and they were struggling to find and maintain bank accounts. And so we had a need for deposits. These were companies that had deposits that wanted to put them in a bank. And it was really as simple as that. The only extra layer of complication was the fact that it really did require us going to school on the regulatory construct for–how would our banking regulators view us banking these types of businesses, and therefore, what type of regulatory compliance infrastructure would we have to have? But it was really all about KYC. Know your customer, AML, any money laundering. These are under the purview of BSA, the Bank Secrecy Act. And so understanding the regulations, understanding that there was a framework in place, existing regulation that we could apply to this industry, we just set about trying to learn what we could and tried to be a bank that was open to banking these types of companies. And we actually opened our first account in January of 2014. So we’ve been doing this now for about seven and a half years and we’ve been through multiple cycles. And here we are.

Dan Weiskopf [00:08:11] When I look at where we are right now, I definitely see a big change from 2017 in that the infrastructure is farther along in how it’s been built. And then I look back as an example of some days when I was at PaineWebber, an old name and I remember very fondly. And when orders were placed, this was at Madison Avenue and 57th Street, you take a little piece of paper, you put it in the pipe, you send it through the hole, and then it would go to the order room, right. The amazing thing that’s happened the last two years is the infrastructure of the crypto market has been built out. And you’re part of that, right. When we started doing a lot of work on your company, we found that your connectivity with so many key players made you the nucleus in some respects, right? Talk to me a little bit about the SEN and what it is and how you operate and how you’re so important to so many different firms.

Alan Lane [00:09:19] Yeah, I really appreciate the opportunity to to talk about the SEN as as you called it. That’s the acronym. It stands for the Silverglate Exchange Network. And as you pointed out, the industry calls it the SEN. Importantly, it is not an exchange, but rather a network connecting exchanges to institutional investors. And this has really been the game changer for Silverglate, for sure. But to your point, the critical financial infrastructure for this entire ecosystem and it was really borne out of–if we step back and think about where we started, because we’re a business bank, we don’t bank consumers directly. So we’ve always focused on businesses and always had an institutional focus. So when we first started banking companies in this Bitcoin space, and I call it the Bitcoin space, because this was before Ethereum and before everything else, obviously it’s evolved quite a bit. But we were banking businesses, institutional investors who were looking at Bitcoin and then increasingly other digital assets as a new asset class, right. So they were looking to invest in these tokens, and the interesting thing about this ecosystem is that credit does not exist the way it does–you just mentioned your prior Wall Street experience and everybody that comes to to this ecosystem comes with a framework that they understand from traditional finance–TradFi as they’re calling it these days–and–yeah, as opposed to DeFi, decentralized finance. But in any event, there are a lot of things that are similar, but some things that just aren’t the same. And one of those is the lack of credit, the lack of prime brokerage. What that means is that–one other important point–the digital currency markets don’t ever stop, right? They trade twenty four hours a day, seven days a week around the globe. And so it’s unlike any other financial market. The closest thing is the FX market, right. But even that’s not truly 24/7, 365, as Bitcoin and crypto is. And so what we discovered is we are banking these companies is that they were spending–they were telling us they were spending an inordinate amount of their time just making sure that they had the right amount of dollars or other fiat currencies, you know, the euro, the yen, the British pound. They had to have the right amount of fiat currency on the right platform on nights and weekends, for instance, because if they wanted to trade when the financial markets were asleep, they needed to have dollars on those on those various platforms. And what we discovered as we were talking with them, we were seeing a lot of transfers going essentially from Silvergate to Silvergate via wire transfer, which was mind boggling. And it was because we were banking, to your point, we were banking so much of the ecosystem, even back in the 2017 time frame that–but we had created the SEN yet. And so what we saw was that companies that wanted to transfer money to each other literally would say to one another, OK, give me your wire instructions. They would say, well, send it to this account at Silvergate Bank. Oh, well, I bank at Silvergate Bank–and so the aha moment–and I really have to give credit to our team here, Ben Reynolds, who’s our chief strategy officer–he had this idea of, well, gosh, what if we could allow book transfers between our customers and we went to some of our customers. I said, would you use this?And they said, yeah, absolutely, but you need to build an API because we need this to–we want to build this into our tech stack so that we can make this programmatic transfer and attribute money down it. If you send money to Coinbase or to one of the exchanges, you want to know that it’s there right now. You don’t want to wait for human intervention, right?So we had to have the API and so 2016, 2017 is when we were building the API, creating all of the innerworkings, if you will. And in 2017 we doubled the size of the bank. We started 2017 as a one billion dollar bank. By the end of 2017 we were a two billion dollar bank. Now we’re, we’re 12 billion today. So obviously we’ve grown a lot more since. But importantly, that doubling in a year was validation that we were on the right track, right. It was the early days of SEN. We only had a couple of hundred customers versus the over 12 hundred that we have today. But that was the birth of the idea. Well, it was the proving of the idea that we could connect players in this ecosystem so that they could transact 24/7. And the last thing I’ll say on this is, is that I think we’re the first bank in the world to bring the traditional financial system that only operates during normal business hours into the 24/7 crypto market so that our customers could, in fact, trade 24/7, around the clock, around the world. We not only reduced the banking friction, we improved liquidity and we reduced counterparty risk, right. Because folks that are transferring to each other have all been vetted by Silverglate, by the regulatory compliance framework that I talked about a few minutes ago with BSA, AML, KYC. So it really became a game changer for the industry.

Dan Weiskopf [00:15:22] Now, you’ve got to B2B model and some of your clients, right, the other banks could be competition for you in the future. How do you view competition versus entities that you need to collaborate with at this point?

Alan Lane [00:15:41] Yeah, that’s a great question, and this crosses over into a little bit of the ethos of the whole digital asset space, right? It is an open source permission list system, right. And so I recognize that the SEN, the Silverglate Exchange Network is a little bit of an antithesis to that, because it is by design, a closed network, right. You have to have an account at Silvergate in order to participate in the set. But from a shareholder perspective, as an investment in Silvergate, that is our competitive mode. Right. That is what differentiates us. But we welcome–this is the way I think about it. I absolutely believe that Bitcoin and digital currencies are here to stay. They’re not going away, which means that roll the clock forward five years, 10 years, I don’t know how long, but every bank in the country, and candidly, every bank of the world is going to be touching digital assets. They’re all going to be banking these types of companies. And we really have that view way back in 2015 when this was a new initiative for us. And we recognized that just having a regulatory compliant program was not going to be a sustainable competitive advantage for Silverglate. We could certainly bank newcomers into the space and we would grow as the industry grows, et cetera. But we recognized early on that as this became more mainstream and larger banks started to come in, that we would lose our first mover advantage. There are plenty of other banks out there who have really strong compliance departments, for instance. And so it was really asking ourselves the question, what can we do to solidify our position in this space and in talking with our customers? That’s how the SEN was born. And so with the exchange network, the SEN, it is a two sided network and it really does benefit from classic network effects. If you think about other two sided networks that we might all experience, think about the ride sharing apps, Uber and Lyft, right? Those are two sided networks with drivers on one side of the network and riders on the other side, right. And every time a new driver joins the network, it creates value for all the other participants in the network. Because now you and I, as riders, there’s one more driver that could get us where we want to go faster. And then similarly, every time more riders join the network, that benefits the drivers because now drivers aren’t sitting idle, and so that’s what perpetuates the growth in these networks. But I just mentioned there are two, right? There’s Uber and Lyft. But why isn’t there a third and a fourth and fifth? Well, it’s because after a while, it’s like if a new entrant wants to come in and they say, hey, we’re going to create, you know, ABC rideshare. And someone says, OK, well, how many drivers you have? Well, we don’t have any yet, but as soon as we get enough riders to sign up, you know, and so it’s kind of that classic network effect. And so what we’ve discovered at Silvergate is that every time we add an exchange or another liquidity provider, an OTC desk, et cetera, it creates value for all the other institutional investors who are already on the platform because they now have one more source of liquidity, right. And then similarly, every time we add institutional investors, it creates value for all the exchanges because now there are more parties for them to transact with. And so this is a network effect that has been feeding on itself. It’s a low cost acquisition strategy, you know, low cost customer acquisition strategy, because we’re not out there advertising seeking customers to join us. Rather, they’re seeking us out because as they want to come into the ecosystem and they’re interacting with different parties, they say, well, first thing you need to do is get an account at Silvergate because that’s how we settle. And so we’ve become this Fiat settlement leg for the ecosystem.

Dan Weiskopf [00:20:23] Yeah, which brings up an interesting question related to–with all your growth, the question is how do you raise capital to facilitate that growth? I mean, everybody has a vision as an entrepreneur, but the access to capital enables you to do that, and you’ve executed brilliantly, I think, in the way of accessing the capital markets while also delivering great value to your clients and your shareholders, for that matter. So thank you. You know, what’s your decision making process when you tap the markets and how do you do it?

Alan Lane [00:21:01] Yeah, I really appreciate those kind words. And it’s definitely a challenge, right. And what I would say is one thing I forgot to mention earlier is when I joined Silverglate, we were a privately owned company. We did not actually go public until November of 2019. And so we had this experience when I joined Silverglate, as I mentioned, it was about 300 million in assets, but it was clean. So we went out and we raised some capital in the private markets to support our growth. And we had grown to 700 million, as I mentioned, before we started the Bitcoin initiative, but still being privately owned at the time, access to capital is not as efficient. Right. And so what we discovered in 2017, when we doubled the size of the bank, being a bank and having regulatory capital requirements, we were, by the end of 2017, we were bumping up against our capital ratios. The capital was a constraint to our growth. And so we raised money privately. We started speaking with investors in late 2017 as we were growing. And we kept upsizing the deal. Right. It was like, well maybe we should raise 35 to 50 million, maybe we should go 50 to 75 and then by, by the end of the year we had set our eyes on, on raising 100million dollars and we got that deal done in February of 2018, right as that 2017 bull market was coming to an end. And so one could argue looking back in hindsight, that we almost raised too much money back in early 2018 because our growth kind of slowed down. But it’s important to talk about what type of growth slowed down. Our asset growth slowed down at the time because the crypto markets went into what, in the industry, is referred to as the crypto winter. The crypto winter of 2018 and ’19. But our customer growth didn’t slow down. We kept adding customers and we are continuing to sign customers up to the SEN. And so what we were doing there was we were actually reducing our deposit concentrations because we had doubled the size of the bank from a deposit standpoint, but we had some rather large customers in there that made up a large percentage. But then as we grew the number of customers through 2018 and ’19, we were essentially staying flat from an asset size perspective, which by definition meant that we were spreading our deposits over a larger customer base. So that was an important building. And folks that have been in the crypto space for a while, they actually talk about these bear markets as times to build. And at Silverglate, it was no exception. We completely changed our wire transfer system in 2018. Actually, we started in ’18 and completed it in ’19. But that was critical for the volumes that we’re experiencing now. If we had not done that and gone to an API enabled wire system for incoming and outgoing Fed wires, we wouldn’t be able to handle the volumes. And in similar fashion we were building functionality on the SEN. We had initially hired outside developers to help us develop it, but then we brought that in-house. We now have software engineers and a project management team. Inside Silverglate, we look like a fintech, we look like a tech company building out the functionality. But I want to bring it back to your question on capital, because when we raised money in early ’18, we were telling our investors, we believe that we are going to continue to need capital to support our growth and therefore we are going to go public. And so in 2018, we began the effort to go public and, but because the market was in a crypto winter, it was a little difficult. So we filed our first one publicly, I think in November of ’18, a full year before we actually got public, because we wanted to be ready so that we could hit the market. And looking back in hindsight, going public and in November of 2019 was actually, again, very providential because it set us up to be able to be a public company, to access the market efficiently as we needed capital to grow. And so the timing couldn’t have been better. And, you know, we took a little bit of a pause, as the entire market did in March and April of 2020 with the onset of the pandemic. And, you know, everybody’s kind of looking around seeing what’s going to happen. But if you go back and look at our quarterly growth, it really started picking up second quarter, third quarter–by the fourth quarter of 2020 it was really clear that we needed capital. And we’ve now successfully, to your point, we’ve done two common equity raises this year and just recently closed on a preferred stock offering.

Dan Weiskopf [00:26:38] And I remember going through that period of time in first, I think it was the first, quarter of 2020, and talking to Venuto, my colleague, I’m like, thing is trading below book value and it’s a bank that has a great history of profitability. So anyway, so great for you for going through this hard times. We just went through a quarter where transaction volumes were down. All right. But again, I think bringing it forward, I think if anything, adoption is accelerating. So my question to you is, what are you looking at on a daily or weekly basis? Do you have special reports that you get sent to you that give you metrics? Hey, we’re doing well this week, even though volumes are down, if that’s the case, by the way.

Alan Lane [00:27:31] Yeah, sure. So, yeah. So for sure, we when we reported our second quarter earnings, we we showed that even though the the dollars across the SEN were at an all time high for the second quarter–and you pointed out that at the onset of the call, almost a quarter of a trillion dollars in the second quarter, but the actual number of transactions had fallen off a little bit from their peak in the first quarter. And what you’re highlighting here, Dan, is actually one of the downsides of being a public company, right?The fact that, you know–and I’ve been in banking for 40 years and Silverglate, when I joined in 2008, it was the first privately owned company–privately owned bank I had ever worked for. And it was great to not have to worry about that quarter over quarter reporting. I mean, obviously, we were growing. We were profitable, as you mentioned, we’ve been profitable for over 20, you know, I think it’s 22 consecutive years now, right through the financial crisis. Right through the most recent one as well. But importantly, when you’re a public company, you know, the market starts locking in on certain metrics, right. And this is a business that is bound to have some volatility in it. And we’ve seen that, as I mentioned earlier, we’ve been doing this now for almost eight years. We’ve gone through I think this is our third crypto bull market. We’ve gone through two crypto bear markets and we’ve been building the entire time. We’ve been growing customers. We’ve been growing usage on the SEN. We’ve been growing fee income. But I do caution folks that it’s not going to be–every single quarter’s not going to be bigger than the last in every single metric. You see, we really have to look on–and you pointed out global adoption of Bitcoin and other digital currencies is really taking off. You’ve got the institutions coming in. You’ve got more and more institutions putting Bitcoin on their balance sheet. It’s–there’s no way this is going away at this point. And so we’re just going to keep building. And the beautiful thing is, because of the SEN, we now have the opportunity to add additional products and services. So give you just one quick example, well actually, I’m going to give you two, Dan, if we have time here. So the first example is foreign currency exchange. It’s a classic service that large banks offer to their customers, but Silvergate, as a small, privately owned bank when I joined in 2008, we didn’t have customers that needed FX. Well fast forward a few years in this global cryptocurrency market, we have a lot of customers who are trading around the world and had we not developed capabilities and the ability to scale those as well and provide, you know, an efficient competitive rate to our customers, that would be an entry point where a bigger bank, for instance, you talk about competition where a bigger bank can say, hey, we’ll offer you a better FX, but we need you to bring your business over here. And so two years ago, we set about developing FX capabilities, which, by the way, because crypto has not been in favor with some of the larger money center banks until recently, many of them did not want to facilitate our ability to offer FX to our crypto customers. So what we did was we actually started going around the world pre pandemic and creating direct relationships with like-minded Banks in other countries who were crypto friendly so that we could, you know, we could keep euros on our balance sheet there and they could keep dollars on their balance sheet with us. And so we’re facilitating FX. So that’s one example that we added that service to the SEN so that our customers that need that capability don’t have to leave Silverglate to go to another bank in order to get a competitive FXrate. The other thing that we launched about 18 months ago is a product we call SEN Leverage, which is Bitcoin collateralized lending. This is a product that–I mentioned earlier in the crypto markets. Credit, traditional credit or prime brokerage doesn’t exist. And so we saw an opportunity to provide our customers with leverage against their Bitcoin holdings. So, and this is allowing us to further solidify our relationships with our good customers because we can offer them credit, extend credit to them against their Bitcoin holdings. And we’ve started to create a network of digital asset custodians so that our customers can hold their Bitcoin with us. But with a third party relationship with Bitstamp or Anchorage or Coinbase Custody or Fidelity Digital Assets, so they can keep their Bitcoin wherever they’re used to keeping it, but pledge it to us and we will then lend them US dollars against their Bitcoin. So this is another service on top of the SEN that continues to solidify our relationship with our customers.

Dan Weiskopf [00:33:08] It’s interesting what you’re saying is, and what I love about talking to CEOs like you, is you’re looking for in other innovators, right? Rather than just trying to pound away and be an evangelist for the price of Bitcoin, you go into the source and finding those like minded folks and how to work with them. Right. And that, to me, is quite honestly very smart and the right way to do it. So let me wist around a little bit. Your background is as a traditional banker, um, you know, it’s the branch network model going to be here five years from now?

Alan Lane [00:33:58] Yeah, that’s a great question, I started in banking as a teller while I was in college. OK, so I’ve, over the last 40 years, I’ve done just about every job you can do in a community bank, you know, and I think it’ll be–I think banks will be around longer than we think they will in the less populated areas. I–we’re just having this conversation internally, because if you go to places in the South or the Midwest where community banking is still really strong, there are bankers in those communities who are essentially kind of the lifeblood of those communities, right? And so I think that continues longer than we think it does. But everything, Dan is going digital and a great example, you know, Blockbuster versus Netflix is kind of that classic example. But I wouldn’t say, OK, I was in a local–in a Southern California mountain community not too long ago. And so this is you know, it’s a couple hours outside of Los Angeles. And I saw in a grocery store a Redbox. I don’t know if you remember what the red Redbox is, the place where you could actually rent a DVD. I hadn’t seen one of those in years, but yet–and there are a lot of people up there in the mountains that are probably renting Airbnbs. And so here we have digital right? So it’s an Airbnb rental, but they probably have a DVD player in there in that rental. And so people are renting Redbox video, still, in addition to, obviously, they’re probably watching Netflix. And so I think what we see happening and banking is a great example of this as new technologies, new delivery channels are added, the other ones don’t go away, right. I literally started in banking when the first ATMs came out in 1980–I think it was ’81. And so everybody thought that with the ATMs that tellers weren’t going to exist and there are still tellers. Having said all of that, at Silverglate we have one branch, it is our headquarters branch. We don’t really have any walk in customers because we have pivoted everything to focus on this digital currency ecosystem and so we are–so take everything I just said about traditional banking is probably still going to be around for a while, but it’s Silvergate we’re one hundred percent focused on on this digital transformation.

Dan Weiskopf [00:36:50] So you deal with a lot of folks who are traders, right. As the guy who always talks about how structure matters, how do you reconcile and align the price of Bitcoin and alt coins, because we don’t want to be too specific, right? And the disruption that’s occurring, you know, obviously it’s about, you know, the utilization, but which metrics do you focus in on to track that growth?

Alan Lane [00:37:27] Yeah, so I use a service–here I’m going to plug somebody unintentionally, but I’m going to answer your question. Coin Metrics is a great company and they’ve got a lot of data on on-chain metrics in terms of, you know, on-chain volumes, the difference, you know, how much Bitcoin, or Eth, if you want to talk about Ethereum, is in different wallets. So they have different segments of wallet categories, the whales. And I forget all the different categories. But the fact of the matter is when we talk about adoption, though it’s really interesting to look at some of that data–and when you come back to structure mattering, the infrastructure is absolutely being built. I mean, I think we’re blessed to be early at Silverglate because we had a need for deposits. And so there’s certainly an element of luck here. If we didn’t have a need for deposits in 2013, I would have still been interested in Bitcoin. I probably would have still bought some, but would Silverglate be this critical financial infrastructure to the ecosystem? Probably not if we didn’t have a need for deposit. So, and then perhaps somebody else would have built something similar to the Silvergate Exchange Network. But the way we look at this is liquidity begets liquidity. And when you’re talking about institutions coming in, you know, it just–if you’re a new institution coming into this ecosystem and you’re not on the Silverglate Exchange Network, you’re likely at a competitive disadvantage to everybody else that is on the network because you don’t have the same access to 24/7 liquidity that your competitors do who are already on the SEN. And so you asked me earlier about metrics and what do I watch? I watch number of transactions. I watch the dollar value of transactions. I watch our deposit levels. Now I watch FX transactions and I watch SEN leverage. Now, I’m not looking at every single one of those every day, but I’m certainly looking at them every week. And I should also say that we have a very engaged board of directors with whom I communicate regularly because you tie all this together with our capital strategy, right, and the fact that we needed to access to capital markets. It’s important that we have real strong communication throughout the organization at all levels, including the board, and then going outside Silvergate to our regulators, et cetera, so that there are no surprises anywhere along the way. So it’s–this is unlike anything I’ve ever done. It is more exciting than anything I’ve ever done in my career. And we’ve got just a great team at Silvergate who show up to work virtually every day to try to help solve problems for our customers to help us grow this ecosystem. We think about security, obviously cybersecurity. We think about regulatory compliance and the fact that we are a critical piece of infrastructure for this entire ecosystem.

Dan Weiskopf [00:41:13] I was going to ask you about–which do you worry more about regulation or cybersecurity as a curveball, right? And you think the answer is you worry about both.

Alan Lane [00:41:26] I worry about both. Yeah, that’s exactly right. And I mean, I think it would be somewhat silly to worry about one over the other. You know, I mean, we–one of the things I will say on behalf of the regulators is they have really come up the learning curve. And, you know, I don’t think I’d be talking out of school to say, you know, in 2014, we had opened a couple of accounts in this crypto space and we invited our regulators into our offices in the summer of 2014. And we provided a Bitcoin tutorial. Again, I keep coming back to Bitcoin because this was right around the time the Ethereum white paper was coming out, actually. But the market at the time was Bitcoin. And I’m really happy to say that that presentation that we gave to our regulators in–I think it was August of 2014–that has aged really well because Bitcoin, you know, the beautiful thing about Bitcoin is it does one thing and it does it really well, you know. It is a non sovereign permission list, distributed store of value. And, you know, the wallet structure, everything about the Bitcoin protocol and how you interact with it in terms of the developers and the miners and the wallet providers, et cetera, that existed then, it’s just been built out more now. And so we explain to our regulators in 2014 what Bitcoin was, the types of companies that were being formed to provide services to this Bitcoin ecosystem and how we were viewing the regulatory requirements that we would be subject to as a bank in order to bank these companies. I go in that little bit of a tangent to share with you that our regulators–we’re a state chartered bank, but we’re also a member of the Federal Reserve. And so both the–at the state level and at the federal level, they’ve been on this journey with us for the last eight years. And so we have a great relationship with them. We don’t launch a new product without, you know, engaging with them early and then helping them to understand how we’re viewing the opportunity, how we’re going to mitigate the risk, whether it’s regulatory compliance or cybersecurity, how we’re going to mitigate that risk. And we know that they don’t want surprises and we don’t want to surprise them. And so it’s been a great journey. And even though we’ve been doing this for quite a while, in many ways we feel like we’re just getting started.

Dan Weiskopf [00:44:12] Well, you know, you bring up a great point. You know, so much of what we’re doing and the reason why we’re doing these videos, frankly, is about education, too. Everybody’s got to be educated on what’s happening, kind of we’re all learning together in a lot of respects, right. You know, so what I worry about in general as sometimes a kid in a candy store, because there’s always so much, you know, happening, right, is focus, you know. How are you evaluating if you are, in fact evaluating potential bolt on acquisitions? Right. I’m sure it’s an opportunity out there for you.

Alan Lane [00:44:55] Yeah, we’ve been looking at acquisitions since before we went public. And we continue to look at whether or not things make sense. I’ll give you a great example. We talked about it a little bit earlier. We talked about custody. I talked about it in the context of SEN leverage and the fact that we’ve been creating a network of custodians. Prior to coming to that structure, though, we seriously contemplated becoming our own custodian. And one of the ways to do that would have obviously been to acquire an existing custodian. Right. And we’ve seen some acquisitions out there over the last couple of years, know Zappos institutional custody business was acquired by Coinbase and BitGo was–it was just announced that they’re being acquired by Galaxy Digital. So, I mean, there are certain–Curve has, or is, being acquired by PayPal. So, I mean, there are a lot of custodian’s out there. And the way we evaluated that opportunity was there are different types of technology being utilized by some of these different custodians. Some of them are this kind of, you know, hard wallets in a bunker–in a former military bunker in Switzerland. And then there’s these hardware security modules, et cetera. But no matter how they’re–and so what does that mean and what does that mean for our customers? It means that our customers are making choices as to which type of custody they think is best for their needs. Some of our customers are high frequency traders. They might have a different view of custody than someone who’s long only who’s just going to buy it and put it away and forget about it. And so what we decided is all of these different methods of custody are valid. All of them are seeking the appropriate SOC 1, SOC 2 reports, et cetera. They’re all hardened security infrastructure. And we would rather allow our customers to choose and integrate with as many of them as makes sense for us. And so we decided not to do an acquisition, but rather to seek out partners who we could then offer to our customers and say, you know what, if you’re comfortable holding your Bitcoin at Fidelity, then you can still do that. We have a relationship with Fidelity. We enter into a tri party agreement. You pledge your Bitcoin to us. We take control of it while you have your loan outstanding and then we relinquish control back to you. But it never leaves the Fidelity platform. You do the same thing with Coinbase, do the same thing with Bitstamp, the same thing with Anchorage. And so that’s an example of where we looked seriously for two years at custody as an acquisition and then decided, you know what, this is a better way to go. And so I tell you that story because we look at this through the lens of solving problems for our customers. And if we can find an acquisition opportunity that we truly believe is additive to Silverglate, that solves problems for our customers in a better way than we can do it ourselves, then that’s the primary kind of gating item for doing an acquisition.

Dan Weiskopf [00:48:38] And by the way, sometimes it’s the deals that you pass on are the best decisions you make.

Alan Lane [00:48:45] Yeah, I think that’s I think that’s right.

Dan Weiskopf [00:48:48] So usually at the end of these calls. I have two wild card questions. OK, when you’re looking at–the first one is when you’re looking at the blockchain today, what do you think investors are not paying attention to that they should be paying attention to?

Alan Lane [00:49:13] Yeah, so one of the thing–and I’m going to come across in my answer, I going to come across as being very critical now of DeFi, but I’m going to go there anyway for–because I’m going to answer your question. And it’s not that I’m, you know, that I’m necessarily negative on DeFi, but there’s a lot of new stuff coming out, there aren’t enough–someone said this, so this is not an original thought, but–so I heard somebody say a few months ago, there aren’t enough like software bug bounty auditors, if you will, to audit all of the different blockchains that are being spun, all the different DeFi protocols that are being spun up. That’s one of the reasons that you’re seeing so many hacks and you just see–now, Bitcoin has as a protocol has never been hacked. But a lot of these DeFi protocols, it’s not uncommon for folks to lose money in a DeFi protocol. A very famous investor recently was invested in a DeFi protocol that got hacked. And now maybe that’s OK, because these are sophisticated investors. They know they’re taking risk, et cetera. But I do worry and we’re starting to see a little bit of this narrative coming out from some of the regulators in Washington or around, you know, investor protection. Right. And so you’ve got this intersection of DeFi moving fast and breaking things and then the ability for consumers, investors to invest in these things. And then, you know, is the government going to come in and try to protect the investor? And so I do worry about that. I don’t worry about it with Bitcoin. Bitcoin is, as I said earlier, it’s doing the same thing that it’s been doing for years. And but anyway, that’s the unpopular answer.

Dan Weiskopf [00:51:30] Well, you know, I have to admit, I think too many people feel smarter than they really are, having gone on the journey earlier. And they’re experimenting and, my goodness, it’s so easy to make money, you know, and I’ll tell you about another story, right? And I’m with you on this. I think it becomes self-fulfilling to some degree, and I get that. But when things are too easy, it can be–you’re left with a lot of surprises. So, you know, the other question that’s a wild card question I’d like to ask is–you got to step away from the bank side. What industries do you see being most disrupted from the blockchain?

Alan Lane [00:52:21] Yeah, so stepping away from the bank side, because obviously the very first use case for blockchain is Bitcoin, right, which is non-sovereign store value, et cetera. And so it’s kind of money–it’s storage and transfer of money on the blockchain. So that’s Bitcoin. I think the area of smart contracts. And I’m not going to mention, well, as I mentioned, Ethereum, because it’s kind of the granddaddy of them all from the smart contract. But there are a lot of protocols that have been developed. And this is really why Ethereum–so why does Ethereum exist? Because there were some things about Bitcoin that the creator of Ethereum thought, well, the block size is too small or the transaction throughput is too small, et cetera, that the speed–and so you’ve got all these different blockchains that are being spun up, many of them, or frankly, all of them, have the ability to build smart contracts on top of them. I will say that Bitcoin also has the ability to. I mean, multi sig is essentially a form of a smart contract, right? I mean, everything about–there’s one school of thought that anything that’s going to be built on Ethereum, anything worthwhile, could eventually be built on Bitcoin. I’m not a coder, so I don’t know if that’s true or not. But it’s interesting that you have all this experimentation going on. So I think smart contracts, but importantly, a smart contract typically needs some type of oracle. It needs some type of of external arbiter of what is true. And so then can that be manipulated? And so there’s going to be a lot of work that has to be done in order to really make smart contracts operate in a permission-less decentralized way without some oracle stepping in and saying, you know, this is the truth–the true answer for that smart contract. And then the other thing I’ll touch on briefly is, is NFTs, these non fungible tokens. I again, I don’t have a lot of original thoughts, Dan, I just read a lot and listen to a lot of podcasts, but I just heard somebody the other day talking about NFTs and talking about the fact that, you know, people think, oh, this is a bubble. But the fact of the matter is it’s inherent in our nature to be collectors of things. Right. Baseball cards or bottle caps, whatever, rocks, gems, coins, you know. So, and if we’re going digital and everything is moving digital, then it certainly seems to make sense that NFTs will have a place in the future. Certainly that exists with gaming. Right. That’s a big area, NFTs at the intersection of gaming. One of the things to figure out, though, is that right now those NFTs, they all have to be built on a specific protocol and there’s not a lot of interoperability between those protocols. And so if you picked the wrong one and then that protocol doesn’t exist in 10 years, what happens to the NFT that you bought that was riding on top of that protocol? So it’s early. And, you know, I mean, people have had the same experience with music, right? I mean, do you use Apple Music or Pandora or Spotify or Amazon music or–and so a lot of those are kind of closed systems. They’re not transferable. And you can have the same kind of thing with NFTs. So a lot to figure out. But it’s not going to slow the innovation. It’s just going to keep on coming.

Dan Weiskopf [00:56:33] Well, thank you very much for spending the time with me today and as a shareholder, thank you for continuing to block and tackle your way to success. Have a great day and be well, be healthy.

Alan Lane [00:56:49] Thank you, Dan. Really appreciate the spending the time with you today and appreciate your support.

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