A piggy bank and a coin with "crypto" written on it in the snow
Illustration: Christopher T. Fong/Protocol

Banks serving crypto are feeling the chill

Protocol Fintech

Good day, and welcome to Protocol Fintech. This Wednesday, Silvergate’s earnings, Dimon’s crypto hire, and more bucks for blockchain gaming.

Off the chain

Has anyone noticed Jamie Dimon’s habit of saying one thing about crypto and his bank doing another? Dimon recently called cryptocurrencies “decentralized Ponzi schemes.” But JPMorgan Chase just hired Aaron Iovine, recently of the now-bankrupt crypto lender Celsius, as executive director for digital assets regulatory policy, according to Bloomberg Law. It’s hiring for other crypto positions. There are two logical conclusions here: Either Dimon’s a hypocrite and doesn’t believe what he’s telling Congress about crypto, or he’s not really running his bank. We’ve noted Wall Street’s growing embrace of crypto as its infrastructure matures. We wonder if part of the problem is some growing up that needs to happen in the C-suite, too.

— Owen Thomas (email | twitter)

Banking crypto in winter

California bank Silvergate Capital greatly grew its deposits and prominence over the past decade by embracing crypto companies as customers. Its fortunes on Wall Street soared along with the price of bitcoin in 2021. But deep into a crypto winter, the firm is hoping to convince investors to think long-term about its potential.

Silvergate’s shares tumbled Tuesday. The 20% drop in its stock followed a double whammy of bad news.

  • First, the bank reported third-quarter earnings per share of $1.28, against expectations from Wall Street of $1.45, according to Zacks Investment Research. The deposits Silvergate holds from digital asset companies fell to $12 billion on average during the quarter, down about 13% from the previous three months.
  • There was also a slowdown for one of Silvergate’s key products, a network that allows crypto exchanges and other clients to instantly transfer funds. Payments on the Silvergate Exchange Network fell by 41% in the quarter to $112.6 billion, which the company said was driven in part by a decrease in stablecoin trading.
  • On top of less-than-stellar earnings, Silvergate CEO Alan Lane also revealed on a call with analysts that the company will not meet its goal to launch a U.S.-dollar-backed stablecoin this year, owing to regulatory challenges. Silvergate earlier this year purchased the assets of Meta’s failed Diem blockchain project to power its stablecoin.
  • Stablecoin regulation has stalled along with the rest of crypto regulation in Congress. The technology for Silvergate’s stablecoin is ready to go, Lane said, but the firm is “working with regulators and policymakers and making sure we get this right.”

Crypto-friendly banks are along for the industry’s ride, up and down. Silvergate shares peaked near $220 in November 2021, which was also a high point for crypto.

  • The company beat expectations with its second-quarter earnings, but some analysts were expressing concern in the lead-up to Silvergate’s third quarter announcement. A downgrade from Wells Fargo two weeks ago questioned if outflows from crypto’s decline would outweigh the benefits Silvergate would otherwise get from rising interest rates.
  • Notably, it wasn’t all bad news for crypto-serving banks. Signature Bank beat earnings estimates Tuesday, helped by deposit growth in the non-crypto parts of its business.
  • Some analysts are looking more long-term for Silvergate. A BTIG report called the bank “undervalued, especially relative to company’s growth prospects given the key role that its banking infrastructure plays for crypto market participants.”
  • Analysts with Wedbush called Silvergate’s results disappointing, but said the firm is “well-positioned to thrive when the crypto market rebounds from depressed levels, and should see revenue ramp up materially in the quarters following the pilot launch of its stablecoin,” which the report estimated could come by next summer.

So the question may be how long Silvergate has to hold on for that rebound. Lane, the firm’s CEO, argued that recent moves by Mastercard, BNY Mellon, and BlackRock to expand crypto offerings should be taken as a positive sign. “There is a lot of institutional adoption that is still coming — none of these things are live yet, they’ve all been an announcement about things to come — so we could not be more optimistic on the long-term trajectory,” Lane said. “But these things take time to play out.” As those new entrants may learn, it’s not always a smooth ride.

— Ryan Deffenbaugh (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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On the money

The IRS wants to make it easier to file crypto taxes. In new draft instructions, the Internal Revenue Service gave more details on how taxpayers should list their crypto transactions, including switching the verbiage from “virtual currency” to “digital assets.”

On Protocol: Investors are still pouring money into NFT and blockchain gaming projects.

Also on Protocol: The European Commission says members should prepare to halt crypto mining in an energy crisis. The commission announced that EU member states must prepare to halt crypto mining “in case there is a need for load shedding in the electricity systems.”

JPMorgan Chase will match neobanks’ early direct-deposit access. The bank believes it can attract or retain customers for its Secure Banking product by adding the feature.

Goldman Sachs’ revamp is official — and plays down its consumer ambitions. CEO David Solomon said Goldman would focus on existing Marcus customers and market fintech products through its workplace and wealth management channels.

Fintech funding deals fell again last quarter. Global fintech venture funding slid 38% quarter-over-quarter to $12.9 billion, according to a CB Insights report.

Overheard

Do Kwon resurfaced to give crypto podcaster and journalist Laura Shin a revealing interview. The Terraform Labs co-founder offered a bunch of not particularly persuasive explanations for Shin’s pointed questions — often backed up by on-chain evidence — about the messy implosion of luna and UST and Kwon’s background in the industry. Of his involvement in the failed Basis Cash stablecoin, “Essentially all I did was join Telegram rooms and shit-post,” Kwon said.

Denelle Dixon, the CEO of Stellar Development Foundation, isn’t as keen as others in the industry on crypto getting new, bespoke rules. “I would hate to see new laws written for crypto, because it’s all off of hype,” she said at a TechCrunch Disrupt panel Tuesday.

Just one question for …
Jonathan Dharmapalan, CEO, eCurrency

Dharmapalan testified last year before the House Committee on Financial Services about implementing a central bank digital currency in the U.S. after helping establish one in Jamaica.

Are crypto tokens “currency”?

Crypto is maybe some form of asset, like a security, or you could even push it as far as stablecoins — some kind of accepted money. But they have no legal status at all. And because of that, cryptocurrencies in any form are not currency — they’re not legal tender, they’re not backed by the government, and they don’t perform the role that currencies, as in cash, plays.

There’s a huge reason for that. The legitimacy of a currency — let’s say the United States dollar — comes from the fact that the law in the United States supports the United States dollar. But it doesn’t stop there. It actually becomes a very powerful instrument because the United States is able to make its payments to its public and to its employees in the United States dollar, and are able to accept its receipts, as in taxes, in the United States dollar. These are things that cryptocurrencies don’t have the power to do.

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With the amount of our economy now dependent on technology, the lack of government regulation is resulting in major risk to companies, and in the end, our own citizens. In the absence of government action, insurance steps in.

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Thanks for reading — see you tomorrow!

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