DISTORTION REPORT

Bank to the Future

The Virtually Unknown Firm Transforming the $11 Trillion
Global Payments Industry in the Next 12 Months
SPECIAL REPORT 2022

Bank to the Future

The Virtually Unknown Firm Transforming the $11 Trillion
Global Payments Industry in the Next 12 Months
infrastructure could be in place by the end of 2022.
BY NOMI PRINS, EDITOR,
DISTORTION REPORT If its new project launches according to plan, it
could become the leading firm powering the global
The events of the last two years have irreversibly digital payments market.
changed the world.
That market was worth more than $5 trillion in
The pandemic… conflicts overseas… shortages and 2020. And in the next few years, it could be worth
inflation… more than $11 trillion, according to consulting firm
Research and Markets.
The changes we’re seeing today usually take years –
sometimes even decades – to unfold. In this report, I’ll show you how you can stake a
claim in the early stages of this massive shift. Let’s
But now, things are getting harder to recognize from
dive in.
one month to the next.

And what we’ve seen so far is just the beginning. HOW CENTRAL BANKERS CREATED
THE GREAT DISTORTION
Every industry is being transformed by what I call
To understand this shift, we first have to look back
The Great Distortion – from energy… to
in time for a moment.
infrastructure… to technology.
See, 50 years ago, the Federal Reserve decided the
But one of the biggest transformations is happening
solution to every problem was to create more
in the world of money.
liquidity.
See, our banking infrastructure is being rebuilt from
Historically, the economy went through volatile
the ground up. And I’ve found a small company at
booms and busts.
the center of this massive shift.
To blunt the severity of recessions, America’s central
This company is building the bridge between the
bank decided to cut interest rates aggressively
legacy banking world and a new financial system.
during downturns. At the same time, it would also
It’s small firm that intends to “modernize” the boost money supply.
financial system.
That willingness to intervene to support the
It already has the intellectual property, technology, economy changed the world.
and engineering expertise to do so. And its

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Politicians, bankers, and C-suite executives got the of these actions.

message.
Unfortunately, if you’re waiting for a return to
The bigger the risks they took… and the bigger the “normal,” I have bad news.
problems they caused… the more likely the Fed was
to come to the rescue. What started out as a temporary disconnect has
grown into a permanent distortion. There’s no going
The Fed’s policies encouraged risky behavior on Wall back to how things were.
Street. They also created massive bull markets… and
rebounds from severe drawdowns… about once a In fact, the distortion is going to intensify… because
decade. the government’s debts are now so large. Those in
power have no choice but to create liquidity at the
Former Fed chair Alan Greenspan’s willingness to first sign of trouble.
step in to support asset prices became known as the
Greenspan Put. The good news is, where there are challenges, there
are also opportunities. And that brings us back to
The market has tested every central banker since. the multitrillion-dollar industry I mentioned earlier.

Within a few months of a new Fed governor taking THE NEW MONEY REVOLUTION
office, the market pulls back. Investors want to know IS JUST BEGINNING
if the new central banker has their back.
Thanks to The Great Distortion, we’re seeing a
The last time that happened was in 2018 when Jerome revolution in the world of money.
Powell took office. The S&P 500 pulled back by 10%.
It didn't bottom until he made soothing comments. It’s a trend I call "New Money." It’s about challenging
the established financial players and fiat monetary
This Fed support system for asset prices has created system… and finding innovative ways to cut out the
a great deal of leverage in the system. The Fed middleman.
doubled and then tripled down on the idea of
fabricating money during the financial crisis of 2008 And at the core of that is the blockchain. That’s the
and the pandemic. technology behind cryptocurrencies.

The dollar’s purchasing power has also been Blockchains are public ledgers. Whatever you put on
declining for decades. That's inevitable when issuing the blockchain is confirmed and recorded by the
more currency is the answer to every problem. entire network.

The too-cozy relationship between central bankers, The blockchain is also fully transparent. Addresses
financiers, and big business has altered society. They might be anonymous, but the transactions are
are now so invested in this system that creating available for anyone to see. It’s almost impossible to
more liquidity is the only policy they know. hide anything on the blockchain.

This is what I mean when I talk about The Great Because of this, blockchains remove the aura of
Distortion. mystery from the banking sector.

The actions of central bankers and governments While The Great Distortion is primarily caused by
created a divide between the markets and the real rampant money creation by central banks… the New
economy. The uncomfortable feeling many people Money revolution is about individuals taking back
feel about the state of the world is a direct product control.

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 DISTORTION REPORT

Teams all over the world are creating value outside In addition, it is important to consider how new
the conventional financial system. And they’re also forms of crypto-assets and digital money may
working to integrate the financial system into the affect the Federal Reserve's responsibilities…
New Money revolution.
It is prudent to explore whether there is a role
All told, the market capitalization of for a CBDC to preserve some of the safe and
cryptocurrencies grew from less than $100 billion effective elements of the financial system of the
five years ago… to around $2 trillion today. present in a way that is complementary to the
private sector innovations transforming the
Of course, the government also wants its piece of financial landscape of the future.
the New Money pie. And the rise of central bank
digital currencies (CBDCs) is a sign of that. Digital currencies offer officials much more
transparency about where transactions take place…
Nine central banks already launched their own And what people do with their money.
digital currencies. The Bahamas and seven eastern
Caribbean states were the first to do so. That’s the main reason for government interest in
developing digital currencies. For them it’s about
There are 15 other central bank digital currencies in control. And it’s also about extending the life of the
the pilot program stage. Sixteen more are under liquidity trend that started 50 years ago.
development. And 40 are at the research stage.
But no matter what their goal is, the trend is clear.
In the U.S., the digital currency trend is picking up Government interest will help take cryptos and
steam at the federal level, too. On February 18, 2022, other digital assets mainstream.
Fed Governor Lael Brainard said:
A TURNING POINT FOR DIGITAL
If the past year is any guide, the crypto financial
CURRENCIES
system is likely to continue to grow and evolve
in ways that increase interconnectedness with Less than a month after Brainard’s speech,
the traditional financial system… something else happened that will propel this New
Money revolution forward.
The Federal Reserve needs to be preparing for
the payment landscape of the future even as we On March 8, 2022, President Biden signed an
continue to make improvements to meet today's executive order on cryptocurrencies. This could
needs… mean a turning point for the crypto space.

Brainard was speaking at the 2022 U.S. Monetary The executive order had been in the cards since
Policy Forum. That’s an annual conference that 2021. But the situation in Ukraine seems to have
brings together economists and policy makers. moved it up his list of priorities. Here’s why…

This year, the conference included a panel On the one hand, you have millions of dollars in
discussion on central bank digital currencies. cryptocurrency donations flowing into Ukraine to
Brainard also said: help those affected by the war. On the other hand,
you have worries that crypto provides a way for
Growing interest in the digital financial
Russian oligarchs to evade sanctions.
ecosystem suggests that technology is enabling
potential improvements that merit In early March, Democratic legislators sent a letter
consideration. to Treasury Secretary Janet Yellen. They expressed
concern about this.

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Among the legislators were Senators Elizabeth But Biden’s crypto order gives us hope for a
Warren and Senate Banking Committee Chairman regulatory framework that would allow crypto to
Sherrod Brown. flourish in the U.S. And, by extension, around the
world.
Then President Biden signed the executive order on
crypto. It marks the first time the White House has Government agencies are already falling in line to
formally weighed in on cryptocurrencies. support Biden’s crypto order.

The first two paragraphs of the text set the order’s Treasury Secretary Janet Yellen wrote that she would
tone. work under the guidelines of the order to “promote a
fairer, more inclusive, and more efficient financial
There, the White House acknowledges the “explosive system.”
growth” of digital assets. And it affirms that the U.S.
“must maintain technological leadership in this And Gensler tweeted that he “looks forward to
rapidly growing space.” collaborating with colleagues across the
government.”
Now, the order did not announce new regulations for
the industry. It didn’t lay out specific positions the This represents the kind of catalyst that will take
administration wants agencies to adopt, either. crypto mainstream. And that brings us to the
company I mentioned earlier.
Instead, the order tasks the U.S. Department of the
Treasury and other federal agencies with developing a OUR ONE-STOP-SHOP IN THE
regulatory plan. It underscores key areas like consum- NEW MONEY REVOLUTION
er protection, national security, and illicit finance.
Silvergate Capital (SI) is the best bridge between
For now, Biden’s crypto executive order is as good as the old money systems and the New Money
it gets for cryptos. revolution.

It shows that the government acknowledges Silvergate began as a conventional bank in La Jolla,
cryptocurrencies as a legitimate and important part California in 1988. It’s been profitable for more than
of American society and the U.S. economy. 20 consecutive years.

And it makes it clear that the U.S. believes In 2013, Silvergate started to focus on its Digital
cryptocurrencies are here to stay… And that it wants Currency initiative. This was the catalyst for turning
to position itself as a leader in the space. the bank into a digital currency powerhouse.

In short, it legitimizes cryptos. Since then, the bank has championed the digital
transactions sector. And it has provided custody,
This is a welcome change. In 2021, Securities and
transaction, and asset management services in
Exchange Commission (SEC) Chair Gary Gensler
digital currencies to its customers.
referred to the crypto market as the “Wild West.” He
said it was “rife with fraud, scams, and abuse.” In late January 2022, Silvergate made its next move
into digital assets. It announced it was buying Diem,
He also made no secret about his intentions to push
a crypto project, for $182 million.
for stricter regulation in the crypto space.
Diem was a project started by Meta Platforms
As of today, no one regulatory watchdog oversees
(formerly Facebook). You might recognize the
the cryptocurrency market.
project under its original name, Libra.

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Silvergate issued 1.22 million extra shares for Diem. 2022.

It also paid $50 million in cash.
In short, Silvergate is picking up the best parts of the
This is the culmination of the bank’s efforts to build Diem project and repurposing them for the
market share in the emerging digital currency emerging digital economy.
economy of the future.
Like Diem, Silvergate’s stablecoin will be linked to
And it could give Silvergate an advantage over other the dollar. This new network will allow it to create a
banks as the U.S. government gets into digital broad market for all kinds of financial services…
currencies. from ecommerce to money markets, stock, bonds,
and loans.
Let’s take a closer look.
It will be the perfect complement to the Federal
META’S LOSS IS SILVERGATE’S GAIN Reserve’s plans for a digital dollar.

Diem was designed to be what we call a “stablecoin.” Now, earlier I mentioned Biden’s executive order.
Because of it, it’s likely that some regulations will
Stablecoins are digital assets that track the value of
come for the crypto sector.
the U.S. dollar or other currencies. They invest in
fixed income securities with low risk – just like The part of the market that is easiest to regulate is
money market funds. stablecoins. That’s because, as I wrote above, they
tend to be less volatile than other cryptos.
They’re designed for use on blockchain and other
crypto networks. But because they’re pegged to fiat At first, regulation might sound like a bad thing for
currencies, they’re often less volatile than other crypto. But it’s actually good news for a network
cryptos. owner like Silvergate. It removes hurdles for
institutional investors to use digital ledgers.
With Diem, Meta was trying to monetize the billions
of users on its social media properties. And that’s not the only thing propelling Silvergate
forward. Let’s take a look.
Most of Meta’s income comes from selling
advertising. The plan was to create wallets for each BUILDING A STRONG NETWORK
user so they could spend Diem on goods and services OF RELATIONSHIPS
available on Meta’s apps. Those Diem would have a
fixed convertibility to the U.S. dollar. The technology Silvergate acquired from Meta was
going to be a blockchain-based payments network.
For Meta, the primary benefit of using a stablecoin
format was to avoid needing to have a banking As demand for cross border transactions via
license. blockchain and ecommerce demand increase…
Silvergate is positioned to lead the market.
Ultimately, Meta failed to convince regulators that
its system would not need a banking license. And so It’s still very early days. But with Silvergate, we get
it sold the platform to Silvergate. the opportunity to own a one-stop-shop in the
evolving payments system.
This is a huge win for Silvergate. It’s an FDIC-
regulated bank. So it already complies with the See, Silvergate already has a strong network of
government’s regulations. And, using the Diem customers, through its Silvergate Exchange Network
technology, it aims to set up its own stablecoin in (SEN).

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 DISTORTION REPORT

SEN is Silvergate’s real-time payments platform. The loan-to-deposit ratio is a way to measure a
Using SEN, Silvergate’s customers can send euros and bank’s liquidity. It compares a bank's total loans to
dollars to each other with immediate access to funds. its total deposits for the same period.

As of February 2022, SEN had crossed $1 trillion in Silvergate’s loan-to-deposit ratio is 12.5%. It’s
cumulative payment volumes. And now, the Diem expected to contract over the coming year. For
purchase could take Silvergate to another level. comparison, JPMorgan’s ratio is 43.8%.

If all goes according to plan, Silvergate could If Silvergate were a normal bank, I would say such a
become one of the first FDIC-insured banks to issue low loan-to-deposit ratio suggests the company is
a successful stablecoin linked to the dollar. not being managed efficiently.

Silvergate is growing on the back of a strong Banks exist to make loans and investments. That’s
network of relationships. It already has over 1,300 how they make money. They should have a
crypto customers. reasonably high number of loans relative to deposits.

This creates a virtuous circle for Silvergate. It But Silvergate is not a normal bank. It focuses on the
introduces its clients onto crypto exchanges. And New Money and cryptocurrencies sectors. The low
then it can offer them collateralized lending and loan-to-deposit ratio implies it’s being very
custody services. conservative with its reserves.

This means customers get access to the entire global That’s one of the primary things that attracted me to
crypto environment through a regulated bank. And Silvergate. It has sector-beating interest income
Silvergate can achieve this at almost zero cost. growth – without taking on leverage. That leaves
plenty of scope for growth.
Something that tends to get missed by the media is
that institutional interest in the crypto sector hasn’t Now, Silvergate’s share underperformed in 2021.
gone down. That’s despite volatility in the Bitcoin One of the reasons is that the bank sold off its long-
price. dated bonds.

As institutional demand grows – from fund That was forward-thinking. Silvergate saw the threat
managers, hedge funds, pensions, and family offices from rising interest rates early and sold while prices
– Silvergate will be one of the first places they turn were high.
to get exposure to this evolving market.
The bank’s assets are now concentrated in very short-
SILVERGATE’S IMPRESSIVE term instruments. These will benefit as rates rise.
FINANCIALS
In other words, Silvergate’s balance sheet is a coiled
As I mentioned, Silvergate is growing its crypto spring poised to benefit from higher rates.
business. Its pipeline of new projects increased 50% in
With Silvergate we have strong profit growth, low
the fourth quarter of 2021, from 200 to 300 projects.
leverage, and a rock-solid balance sheet.
Silvergate also has a strong record of prudent bank
Under normal circumstances, that would make
management. Net interest income is expected to
Silvergate an attractive company. But remember,
increase by at least 75% over the next couple of years.
Silvergate also bought Meta’s Diem technology at a
Silvergate is achieving that with a low loan-to- bargain-basement price.
deposit ratio.
It’s an incredible opportunity for early investors.

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LED BY AN EXPERIENCED Silvergate provides a single point of entry for every

BOARD OF DIRECTORS facet of this emerging New Money sector. No other
stock offers that kind of breadth.
Finally, a word on Silvergate’s impressive Board of
Directors. Its financials are terrific. And the stablecoin it aims
to set up this year could very well become a global
Silvergate’s Chairman of the Board is Michael
standard in the near future.
Lempres. He’s a former White House fellow and
worked in the U.S. Department of Justice. Silvergate’s share bobbed around, mostly above
$100, until mid-March. Then it began to attract
Lempres also has experience in the digital assets
interest.
space.
I don’t expect it to stay under the radar for much
Before joining Silvergate, he was chief legal and risk
longer. As digital assets become a more mainstream
officer of Coinbase. That’s the biggest crypto
solution to real-world problems, Silvergate is going
exchange in the U.S. He also served as general
to become a major player.
counsel of BitNet, an early digital currency company.
Action to Take: Buy Silvergate Capital (SI) up to
Others on Silvergate’s board worked at banks I also
$175 per share. My 12-month target is $300.
worked at during my 15 years on Wall Street.
If the company achieves only a fraction of its
Scott Reed was an investment banker at Bear
potential in the New Money sector, the target of
Stearns, in its Financial Institutions Group. And Paul
$300 might be conservative.
Colucci worked with Goldman Sachs. Colucci was
involved in over $5 billion in transactions for That said, Silvergate Capital is a volatile stock. Don't
commercial mortgage-backed securities. chase the price if it goes above my buy up-to-level.

Now, I don't know Silvergate’s board personally. Happy investing,

But I can tell you, connections like these give

Silvergate a huge advantage over other stablecoin
projects in getting a foot in the door with U.S.
regulators.

BRINGING IT ALL TOGETHER

Nomi Prins
The world is a messy place, and the future is
Editor, Distortion Report
uncertain. To get by, we need solutions.

The New Money revolution is going to create a

whole new financial system. And Silvergate is at the
center of it.

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