To many banks, bitcoin and other digital currencies are a mania, or worse. But to a handful of small lenders, they are a moneymaker.
Take Silvergate Bank, a three-branch lender that until recently focused mostly on local businesses in the San Diego area. Last year, its assets nearly doubled to $1.9 billion from $978 million, largely because of business flowing in from crypto-related companies.
Big banks’ decision to largely shun the crypto world has left an opening for smaller lenders such as Silvergate, Metropolitan Bank Holding Corp. in New York and Cross River Bank in Fort Lee, N.J. In part their decision reflects an environment where community banks often struggle to differentiate themselves, given larger firms often can offer consumers and businesses largely unmatchable conveniences with their geographic reach and deployment of mobile and other technology.
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These banks are taking a calculated risk to embrace an untested new market that is associated with a variety of hazards, itself a striking stance in the staid world of banking. Virtual currencies remain unpredictable, defined by wild price swings, increasing regulatory scrutiny and a relative lack of transparency that banks in a postcrisis world tend to shun.
“They’re taking on a risk, and going against the inherent view (of crypto) that ‘It’s all evil over there, don’t touch that stuff,’” said Brian Stoeckert, a partner at consulting firm Stratis Advisory, which specializes in crypto businesses. “But then there’s also a view of, ‘OK, well, they’ve got to get banked somewhere.’”
So far, the Main Street banks have landed customers that are well-known in the crypto world, including the exchanges Coinbase, BitFlyer and Kraken, which allow users to buy and sell digital currency.
Many Wall Street banks, meanwhile, are resisting the idea of trading crypto. Others have restricted customers from using credit cards to buy digital currency. Bitcoin has dropped by more than half since its December record high.
‘Banking in this ecosystem is not for the faint of heart.’
“Banking in this ecosystem,” said Silvergate Chief Executive Alan Lane, “is not for the faint of heart.”
Mr. Lane, 56 years old, said he became interested in cryptocurrencies several years ago, after reading some predictions about how they would replace the need for banks. Along the way, he learned about crypto exchanges and related companies that, despite a proposition that is largely anti-bank, still need bankers. Silvergate, which is privately held, said it now banks about 250 crypto companies.
Mr. Lane said he isn’t conflicted about being a banker to crypto businesses. “At what point as a banker do you pull your head out of the sand?” he said. “Every banker should be learning about the technology.”
The business can take several forms. Exchanges that let customers buy and sell virtual currency need a place to store their customers’ money and a way for them to convert crypto to dollars. Other crypto companies call banks for help with normal expenses like rent and payroll.
Silvergate says it has also lured hedge funds, family offices and other institutional investors that want to invest in crypto but can’t get their primary bank, such as Bank of America Corp. or JPMorgan Chase & Co., to execute those transactions. The two banks declined to comment.
Genesis Global Trading Inc., a digital currency trading firm, has been banking with Silvergate for several years. Genesis Global CEO Michael Moro acknowledges that a bigger bank would have some advantages. But he said he appreciated Silvergate’s openness to the crypto world, especially after watching other crypto companies go out of business after losing their bank relationships.
“I sat down with Alan early on and he cared about bitcoin,” Mr. Moro said. “He really believed in the potential of what this might become, and honestly it sort of was a refreshing take given the sentiments expressed by some of the other banks, especially the biggest ones.”
Mark DeFazio, CEO of the six-branch Metropolitan Bank, said that doing business for digital companies has allowed his company to increase fee income, which more than tripled in 2017, largely from crypto transactions. The bank has also been able to build up deposits without racking up interest expenses or installing lots of costly new locations, which are often the tactics employed by small banks to juice deposits.
“You could just keep building branches, which is a bad strategy,” Mr. DeFazio said. “We noticed a long time ago that the payments world was changing.”
The regulatory framework for cryptocurrencies, and for how banks can interact with them, is still uncertain. Silicon Valley Bank, of Santa Clara, Calif., which is known for embracing disruptive technologies, has done business with crypto exchanges but has more recently decided to focus on companies working with blockchain, the technology that enables crypto trading.
“You’re getting some level of guidance from regulators, but there’s not total clarity,” said Jake Moseley, head of the bank’s national fintech practice. “We’re being selective at this stage until we get greater clarity.”
The U.S. Treasury’s Financial Crimes Enforcement Network said that anti-money-laundering laws apply to companies that transmit or issue digital currencies and the banks handling those transactions. The banks that have adopted the crypto strategy say they have kept banking regulators well-informed and have rejected clients that don’t meet their standards.
“I don’t look down on anybody who looks at this and says, ‘Gosh, it’s risky,’” said Mr. Lane, the Silvergate CEO. “We’re just very blessed that we have a culture here where we took an interest early.”
Write to Christina Rexrode at christina.rexrode@wsj.com
Appeared in the May 23, 2018, print edition as 'For Small Lenders, Bitcoin Is a Moneymaker.'