Silvergate Capital Corp (SI) 2022 Q3 法說會逐字稿

Hello, and welcome to today's Silvergate Capital Corporation Third Quarter 2022 Earnings Conference Call. My name is Jordan, and I'll be coordinating your call today.

(Operator instruction] I'm now going to hand over to Hunter Stenbeck to begin. Hunter, please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation in the Silvergate Capital Corporation Third Quarter 2022 Earnings Call. With me here today are Alan Lane, our Chief Executive Officer; Tony Martino, our Chief Financial Officer; and Ben Reynolds, our Chief Strategy Officer.

As a reminder, a telephonic replay of this call will be available through 11:59 p.m. Eastern Time on November 1, 2022. Access to the replay is also available on the Investor Relations section of our website. Additionally, a slide deck to complement today's discussion is available on the IR section of our website.

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors, including the COVID-19 pandemic, that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements.

Now I would like to turn the call over to Alan.

Thank you, Hunter, and good morning, everyone. Silvergate reported strong third quarter results even as the broader digital asset ecosystem continued to experience challenges. Against this backdrop, Silvergate delivered record net income available to common shareholders of $40.6 million, an increase of 13% compared to the second quarter, driven by our diverse revenue streams and progress on our strategic initiatives. Before I dive into our results, I want to provide some color on the broader digital asset ecosystem.

In the third quarter, Bitcoin hit its lowest price and market cap of the year. We have not seen these levels since the fourth quarter of 2020. At that point in time, Silvergate had fewer than 1,000 digital asset customers, $2.6 billion of average digital asset deposits and only $59 billion of SEN volumes. By contrast, this quarter, we have more than 1,600 customers, average deposits of $12 billion and SEN volumes of $113 billion, which is a testament to the strength of our platform over the last 2 years and the dedication of our team.

As we've done in the past, we worked with Coin Metrics again quarter to better understand how activity on the SEN correlated with the broader digital asset industry. According to their data, in the third quarter, both Bitcoin and Ethereum dollar trading volumes increased compared to the second quarter. The SEN saw lower daily trading volumes this quarter with transfer volume of $113 billion, a decrease of 41% on a sequential basis. Volumes were mainly impacted by trends in the broader industry, specifically within stablecoins, as volumes from stablecoin issuers, such as USDC, saw a sizable drop in market cap during the quarter. It's important to note that the correlation between the SEN and the industry won't always be linear, given the different use cases of the SEN. We remain confident in the power of the platform and the opportunities for expansion within the network.

Now moving to our key metrics. Average deposits from digital asset customers declined to $12 billion in the third quarter compared to $13.8 billion last quarter. Importantly, we saw the range of deposits during the quarter narrow to a high of $14 billion and a low of $11.1 billion, signaling lower volatility in our deposit base. The number of digital asset customers continue to increase, reaching 1,677 in the third quarter, an increase of over 350 customers since the same quarter last year. We added over 90 clients on a sequential basis as we continue our focus on adding high-quality clients that bring the most value to our platform. Our pipeline of potential new digital asset customers remains robust with over 300 prospects.

Turning to SEN Leverage, our Bitcoin collateralized lending product. We saw continued strong demand for the product with total approved commitments growing 9% to $1.5 billion compared to $1.4 billion at the end of the second quarter. In addition, we experienced a range of outstanding SEN Leverage balances during the quarter between $268 million and $322 million, with an average outstanding balance of $308 million. All of our SEN Leverage loans continued to perform as expected with no losses or forced liquidations. As a reminder, by design, these loans are overcollateralized and our customers have the ability to draw, pay down or pledge additional Bitcoin as collateral to comply with the terms of their loan agreement 24 hours a day, 7 days a week.

Finally, I would like to provide an update on the progress we are making towards our strategic initiatives. We continue to balance our culture of innovation with our prudent risk-based approach to launching new products and are actively engaged with regulators and policymakers in anticipation of launching a regulatory compliant tokenized dollar on the blockchain. Unfortunately, we no longer expect that to happen this year. That said, we remain committed to bringing blockchain-based payments to our customers in a regulatory compliant manner, and we'll continue to provide additional updates on this initiative and the other exciting opportunities being explored by Silvergate in the coming quarters.

While we are taking a balanced approach, as you can see on Slide 4, the opportunity ahead remains massive. We believe Silvergate is one of the best position in the industry to both power the current $1 trillion digital asset market and disrupt the $67 trillion global commerce market with a blockchain-based payment solution. As the digital asset ecosystem continues to grow and evolve, we will continue to take a customer-first approach to product innovation.

In line with this approach, I'm pleased to share that in the fourth quarter, we will introduce updates to our customer support model to provide our customers with support 24 hours a day, 7 days a week. We already offer real-time payments with 24/7 availability through SEN and Euro SEN, and we have maximized payment windows to give our customers increased opportunities to execute their banking activities when it's convenient for them. Enhancing our existing customer support model will be incredibly meaningful for our customers who work in digital assets, which is an industry that operates without time constraints or geographic barriers.

Finally, earlier this year, we announced the launch of the Euro SEN, which enables customers to transfer euros in near real time, 24 hours a day, 7 days a week. This quarter, we gained momentum on this platform with the rise in ECB rates, and in turn, customers held more euro deposits. This technology is just one example of our ability to provide product that meet our customers' needs. I am proud of the progress we made this quarter against our strategy and look forward to what's to come as we close out 2022.

I'll now turn it over to Tony to review our financial results in more detail before we take your questions. Tony?

Thank you, Alan, and good morning, everyone. Starting on Slide 5 with our key financial results. Against a challenging backdrop in the overall digital asset industry, Silvergate reported another quarter of record net income available to common shareholders, reaching $40.6 million or $1.28 per diluted common share compared to $35.9 million or $1.13 per diluted share in the second quarter and up from $23.5 million or $0.88 per diluted share in the third quarter of 2021. Revenue of $89.3 million was up 12% compared to the second quarter and up 73% compared to the same quarter a year ago, driven by higher net interest income, which I will discuss in more detail later on. We maintained strong capital ratios during the quarter with our Tier 1 leverage ratio at 10.71%, an increase of 7% compared to last quarter, and 23% from the third quarter of 2021.

Next, on Slide 6, average digital asset customer deposits were $12 billion in the quarter, down 13% compared to last quarter. As Alan mentioned, we saw lower volatility in our deposit base as the range of deposits during the quarter narrowed within a high of $14 billion to a low of $11.1 billion. Our weighted average cost of deposits for the quarter increased slightly to 16 basis points compared to essentially 0 last quarter as we utilize short-term brokered certificates of deposit as part of our liability management strategy. The annualized cost of digital asset deposits remained at 0, reflecting our digital asset deposit gathering strategy.

Turning to Slide 7. Net interest income was $80.9 million in the third quarter, an increase of $10.3 million compared to the second quarter and $43.2 million compared to the third quarter of 2021 as we continue to benefit from our asset-sensitive position within a rising interest rate environment. Net interest margin was 2.31% for the third quarter compared to 1.96% in the second quarter and 1.26% in the third quarter of last year. The increase in NIM from the prior quarter was partially mitigated by the impact of derivatives as we increase our focus on managing down rate interest rate sensitivity.

Our securities portfolio totaled $11.4 billion with a yield of 2.21% for the third quarter, down slightly from a balance of $11.8 billion at the end of the second quarter, with a corresponding yield of 1.66%. Year-over-year, securities increased $4.2 billion. As part of our risk management strategy, we hedged approximately 40% of our interest-earning assets to reduce interest rate risk.

Moving on to the loan portfolio. On a year-over-year basis, total loans were down $235.8 million or 14% as we continue to divest our 1-to-4 family, multifamily, and commercial real estate loan portfolios. During the quarter, we sold $3.6 million of 1-to-4 family real estate loans and transferred an additional $33.9 million of 1-to-4 family real estate loans to held for sale. As a result, the allowance for loan losses decreased to $3.2 million from $4.4 million in the second quarter.

As we discussed last quarter, we are currently operating in a rising rate environment, and Silvergate continues to be well-positioned for further rate hikes. As of September 30, 2022, approximately 63% of our interest-earning assets were adjustable rate. To give you a sense of our current interest rate sensitivity, assuming a static balance sheet and a positive 25 basis point interest rate shock, net interest income is estimated to increase approximately $16 million over a 12-month period.

Turning to Slide 8. Noninterest income for the third quarter of 2022 was $8.5 million, which decreased $0.8 million compared to the prior quarter and $5.6 million compared to the third quarter of 2021. The decline in non-interest income on a year-over-year basis was primarily due to the gain on sales of securities recognized in the prior year.

Slide 9 shows noninterest expense for the quarter of $33.2 million, up $2.6 million from the prior quarter and $10.8 million compared to the same quarter last year. The increase in non-interest expense compared to the second quarter and prior year is primarily due to increases in ongoing investments related to our strategic growth investments. We will continue to make strategic investments during the fourth quarter to support our growth and initiatives. We continue to expect full year 2022 operating expenses to be in the range of approximately $130 million to $140 million, excluding any intangible amortization that we may come in toward the low end of this range. Overall, I'm proud of our results this quarter and remain confident in our trajectory through the rest of 2022.

With that, I would like to ask the operator to open up the line for any questions. Operator?

[Operator Instruction] Our first question comes from Manan Gosalia of Morgan Stanley.

Just on the SEN platform and the volumes there. I know the volumes are down 40% Q-o-Q. You know I hear you that stablecoin was a big driver of that. I guess the question is, is that a function of the greater stability in Bitcoin prices in the past quarter relative to 2Q? And do you think that if we see a rebound in volatility in Bitcoin and other crypto prices, do you think we should expect a similar rebound in SEN transfer volumes? Or I just wanted to get your view, is it a function of liquidity becoming more scarce, interest rates going up? Do you think we're at a new normal for SEN transfer volumes?

Yes. So I'm going to ask Ben to comment a little bit more in just a minute on kind of some of the broader things that drive SEN volume. But as we've shared in the past, the power of the SEN is really best demonstrated when there's a lot of volume and volatility in the price of Bitcoin and the other digital assets. And we certainly saw that in the second quarter, when there was a lot of volatility with some of the leverage unwind in the ecosystem. And then to your point, as volumes across the broader ecosystem calm down a little bit and we've seen the volatility, for instance, in the price of Bitcoin has come way, way down. And so that just provides less trading opportunities for a lot of our customers who use the SEN. But we should also point out, and this is where I'll ask Ben to comment just on the fact that it's really difficult to pinpoint exactly where the volumes come from and to look for correlations with the broader ecosystem because there are so many different drivers. Ben, do you want to add any comments to that?

Yes. Thanks, Alan, and thanks for the question. That's exactly right. I mean when -- previously, we had reported using Coin Metrics data and specifically, we're using the trusted exchange volume data. And when you look at that trusted exchange volume data, I think there's about 15 exchanges or so that make up that data set. And as you know, we have over 1,600 customers at Silvergate in the digital asset ecosystem. We first introduced that metric back, kind of in the middle of a bull market and now we're in a bear market. And so we saw that sort of that lack of correlation in those 2 numbers this quarter. That said, there were several other reports out there about volumes being flat quarter from one quarter to the next. But I think the initial part of your question exactly nailed it, which is we haven't seen price volatility this quarter and at this level for 2 years now. And so that is probably the most significant driver. But back to the point, there are multiple uses for the SEN, including stablecoins, which were down pretty dramatically this quarter. So overall, not that surprising given the macro backdrop.

And then maybe as a follow-up, can you talk a little bit about how you're thinking about the balance sheet, especially as we go into 2023. You brought on some brokered CDs and FHLB funding during this quarter. Just wanted to get a sense of are you managing to a specific balance sheet size or to a cash level? And I guess the question is, why not let some of the shorter data securities runoff to fund some of the deposit clients?

It's a great question. Yes, I'm sorry, go ahead, Tony. I was just going to kick it to you.

Thanks, Alan. Sorry to jump in. Thanks for the question, Manan. Yes, so the strategy on the balance sheet side hasn't really changed and not expected to change. The composition of the balance sheet between the end of the third quarter and the end of the second quarter is relatively consistent. And as you indicated, we did use some short-term wholesale funding to supplement and maintain a relatively stable level on the asset side. But you would have seen there has been some amortization on the securities portfolio. But by and large, we're happy with the performance of our investment portfolio. And so we've kept stability on that portfolio during the quarter.

Our next question comes from Steven Alexopoulos of JPMorgan.

I want to start, in terms of delaying the rollout of a stablecoin this year, is this tied to a regulatory hurdle? Is it a technology hurdle? Can you give more color there? And is there an updated time line?

So first and foremost, I'll say that it's certainly not a technology issue. The technology that we acquired earlier this year was ready to go when we acquired it. And so it really is, as I said in some of my prepared remarks, it's working with the regulators and with policymakers and just making sure that we've got this right. We still feel very strongly that we are in the best position of any other bank out there to launch a regulatory compliant, safe and sound, tokenized dollar on the blockchain. And we're not in a position at this point to provide an update on the time line. And we're certainly disappointed that it looks like we're going to miss our goal of launching it this year. But you shouldn't read anything more into that in terms of -- I mean, we continue to build the operational muscle internally, the regulatory compliance muscle, and just working really closely with the regulators to make sure that when we launch something, that we don't hit any speed bumps along the way.

In terms of a follow-up, so if we look at the digital asset deposits of $12 billion average, could you give us a sense how much of that is related to stablecoin volumes at this point? And do you see balances there stabilizing in this $11 billion to $14 billion range? Or is there still more downside?

Yes. I'll take the second part of the question and then kick it to Ben for the stablecoin portion. But in terms of do we expect to see stability going forward? I mean the one thing we've learned, having banked this ecosystem for almost 9 years now, is that that's one of the reasons, Steve, that we don't provide guidance, because it's just really difficult to predict the future. What I will say, though, and I've made this comment in the past few months, that the drawdown in deposits, given the broader cryptocurrency bear market, combined with the macro backdrop, the drop in deposits is not surprising. And in fact, if you go back and look at the last time we experienced the beginning of a bear market, which was in 2018, we saw very similar activity on the deposit side with a drop from the high to a drop of about 12%, 13% going from kind of the peak in the first quarter of 2018 to the second quarter of 2018. And then things kind of stabilized. And I'm not predicting that it's going to remain stable now. I'm just kind of pointing out what we experienced the last time we went into a bear market. But importantly, back then, we continue to add customers. We were just starting to drive SEN adoption. And we're doing the exact same thing now. As we pointed out, we've added over 90 customers in the third quarter of this year, and our pipeline remains every bit as strong as it has been all year. And so what we hope to see is, as you mentioned, stability in the deposits while adding additional customers, so that we continue to prepare for the next kind of turnaround in the market. But let me ask Ben to comment on the stablecoins.

Yes. Thanks, Alan. So I think in the quarter between Q2 and Q3, we saw the total market value of USDC decline from $55 billion to $47 billion, which is about a decrease of 15%. Silvergate average deposits were down about 13% or so. And so that's meaningful just from a directional standpoint. Recall that Silvergate is the transactional bank for the regulated stablecoin issuers that are out there, so that when new stablecoins are minted or burned, that activity often happens over the SEN network because it's 24 hours a day, 7 days a week in real time. And so nothing has really changed for us in terms of being the transactional bank for those platforms. And we've always encouraged our customers to take their sort of excess deposits, if you will, or the deposits that they don't need for issuance and redemption to other banks that do pay interest. And we really haven't seen anything change in that realm over the quarter. But we do think that the decrease in overall market cap is just maybe a validation of sort of the broader macro trend and also reflective of what we're seeing from our customers. But that's how we think about that one.

Our next question comes from Dave Rochester of Compass Point.

Just wanted to ask a quick one on the hedging. Can you just talk about what you've added this quarter and the terms on that, some of that forward starting at all? I know you've got some info in the Q, but just trying to figure out what's new and then what's the trajectory or the plan on that hedging going forward?

I'm going to let Tony take this one, Dave. I appreciate the question. I'll just say upfront that as you pointed out with the second quarter Q, there will be additional detail in the third quarter Q and when that comes out. So not sure how much more we can say at this point. But Tony, do you have anything you'd like to add to that?

Yes. So Dave, just in response to your question, the hedging kind of takes 2 flavors. But part of it is hedging for rates down. And then part of it is some hedging related to the fair value of some of the fixed rate portfolio. So as we provided in the earnings deck, the aggregate hedges total about 40% of interest earning assets. It's made up of a combination of those 2 flavors. And the bulk of those hedges were put on during the second quarter. So our asset sensitivity has remained relatively consistent between the end of the second quarter and the end of the third quarter. And as Alan said, we'll provide more details in the Q.

And any thoughts on the go forward? Are you good for now? Are you thinking about layering more in over the next couple of quarters? How are you thinking about that? And where does it stop, when you hit neutral, or will you remain asset-sensitive at the end of it?

Yes. I think the current -- we're observing like everyone else, pretty volatile macro environment. So we're going to -- nothing to update at this time, but we're continuing to evaluate and monitor the macro environment and our posture on the balance sheet.

Our next question comes from Joseph Vafi of Canaccord.

Just a couple for me. Maybe we could circle back on the stablecoin initiative just a little bit more. I mean, there clearly are other, at least decently regulated stablecoins that are out in the market today. I know you're really focused on something for commerce. And so if you could kind of maybe provide a little more color here on perhaps some of that regulatory and policy work you're doing? Is it specific to e-commerce-related activity with the stablecoin, or is it just kind of more full regulatory compliance? Perhaps those 2 are the same thing? And then maybe I'll have a follow-up after that.

I'm going to ask Ben to jump in here and talk a little bit about where we are in the stablecoin and then I may come in with some further comments. But Ben, do you want to kick us off here?

Yes. So I think that what's become apparent is the current -- when you look at the current usage of stablecoins today and the current market cap, it's a -- let's call it, $150 billion in round numbers. And when you -- and they're used primarily for digital currency trading use cases for folks that want to take risk off and get value on to exchanges that don't have fiat rails. And I think what's become clear to regulators and policymakers is that using the technology for payments is a massive opportunity at a massive scale that really dwarfs the $150 billion that's available today. And so the nature of these conversations are really around what does this look like at scale? If there were to be, let's say, $1 trillion worth of value in stablecoins, what type of risk-based approach do you need to have in place? How do you invest those funds? How do you make sure that the end-user when they present their token can ultimately receive $1 back and make sure that you have the appropriate consumer protections in place?

And so I think that really that's what we're seeing and that's what we're feeling from commentary with folks. There's certainly been a lot of regulatory commentary in the general public over the last 60 days. And I think it's indicative of the fact that people -- this is relatively new technology, a relatively new concept and with just a massive TAM. And so because of that, as Alan mentioned in his comments, we want to make sure that we get it right. And we do think -- we continue to think that we are the best positioned bank of anyone out there to be able to deliver on this opportunity. But Alan, did you want to add anything?

No. Why don't we see what follow-up question Joe has at this point. Thanks, Ben.

That makes a lot of sense. I mean, it's $150 billion on stables for crypto trading related activity versus kind of something that kind of honestly looks and feels like M2 money supply, if it was used more broadly. That's a big difference, obviously.

And then maybe just one quick follow-up here. If we could focus on the customers, the new customers coming on in the quarter, if we could perhaps get a feel for, are these newer customers, are they bringing kind of -- what kind of deposit balances are they bringing in? And how do we kind of offset that versus perhaps smaller deposits for existing customers and kind of how to feel about new customer contribution to deposits versus what the macro may mean for lower deposits for existing customers?

Yes. Joe, that's another great question. And I think Ben has got some good data for you on that one.

So obviously, we look at our customers' deposit balances by category on a regular basis. And I think that when you look at exchanges and institutional investors, we definitely saw outflows in the quarter, and we think that those are indicative again of that lower price volatility and continuous low volumes. As you suggested, we did add over 90 customers in the quarter and close to 300 this year in 2022. From the new customers that have come on platform, we've actually seen about $1 billion in deposits from those customers. And we -- typically, that will continue to grow as they finish the onboarding process and get fully integrated within the SEN platform. So we are seeing really good engagement, really good interest from customers that are in the pipeline and that are now -- that have now on boarded. Of course, that's being offset by the macro conditions in the broader crypto industry. And so overall, given the state of things, this feels sort of, I guess, consistent with what we would expect.

Our next question comes from Michael Perito of KBW.

Just a follow-up on kind of the balance sheet strategy from here. Understanding it's challenging to predict where deposits go, but maybe a hypothetical, I mean I'm just trying to understand how much of the kind of building the brokered CDs and borrowings is kind of sustainable versus temporary as you guys see it? I mean if deposits continue to reduce next quarter, I mean, does the balance sheet start to shrink? Or do you guys expect to try to maintain that really small spread in the overall asset size in that scenario? Or you guys thinking about it in a different way?

Let me touch on this really quickly, and I'll see if Tony has any additional thoughts. As we built our securities portfolio through the rapid growth that we experienced, as you may recall, we attempted to -- while we were buying securities, keep the majority of those relatively short in duration with adjustable rates, et cetera. And so we continue to benefit from the rising rate environment. And even though we started to put some hedges in place, as Tony mentioned in his prepared remarks, we continue to benefit -- our earnings continue to benefit from a rising interest rate environment, albeit at a lower pace. The benefit is slowing down. Having said that, there's also a little bit of a lag in the benefit that we experienced in the rising rate environment just based on the indexes and when the various securities reprice. So we still have a little bit of a tailwind there in terms of earnings impact while rates are continuing to rise. So again, we don't provide guidance, Mike, and we'll kind of take it as it comes. But it certainly so far hasn't seemed to make sense to sell some of the securities that might be closer to par due to the adjustable rate nature and give up some of the forward earnings potential of those same securities. And with that, Tony, I don't know if there's anything further that you'd like to add to that?

Yes. No, I think that -- not much to add on that, Alan, other than to say, Mike, you've seen our kind of our Tier 1 leverage ratio, which is our kind of key ratio is close to 11% in the quarter. So it's gone up. So there's plenty of balance sheet capacity. And as Alan said, there's typically a 60-to 90-day delay in the repricing of the adjustable rate securities. So some of those benefits from interest rate rises even in September, aren't visible yet on the top line. So we'll continue to benefit from asset sensitivity going forward.

And then just secondly, appreciate the color on kind of the new customer deposit balances and engagement. Just as we think about how that translates to kind of the digital asset customer fee income, which was about $8 million this quarter. Obviously, my understanding is that stablecoin related activity really doesn't impact that. So is it -- I mean, I guess, as you guys see kind of this lower lull in activity this quarter, but continue to add new customers, are you guys optimistic that maybe we can start to see that figure reverse the trend of the last few quarters of contraction?

Yes. I think, Mike, very broadly, while none of these metrics are necessarily drivers of each other, they are fairly correlated. And what I mean by that is going back to my earlier comments around SEN activity and the fact that with lower market trading volumes and lower price volatility, that's resulted in obviously lower SEN volumes. It's also been correlated to lower transactions, the on-ramping and off-ramping of dollars with existing customers who are wiring in money or wiring out money, et cetera, there's just less activity. So it's really hard to predict. The one thing that we have confidence in is that as long as we're continuing to add customers who are planning to use the SEN as the market, as the broader crypto market stabilizes, we think the long-term trajectory is still up into the right. I mean, if you zoom out and just think about some of the announcements, the institutional announcements that have been made in the last 2 or 3 months or so with the BlackRock-Coinbase partnership, NASDAQ announcing crypto custody, Visa, MasterCard just yesterday, the BNY Mellon custody announcement. There's just -- there's a lot of institutional adoption that is still coming that -- and none of these things are live yet. They're all -- they've all made announcements about things to come. And so we could not be more optimistic on the long-term trajectory, but these things take time to play out.

Our next question comes from George Sutton of Craig-Hallum.

I'm curious if you could walk through more of a same customer sizing of deposits with really the intention to try to understand an average account will obviously react to volatility but also the higher interest rate options that they have. Is there any way to sort of break those 2 apart in terms of the impact?

Yes, Ben, do you want to take that one?

Yes. The short answer is, unfortunately not. We've said and will continue to say and this comes directly from our customers that really what they want is they want a robust trading environment with a lot of volume, a lot of volatility, a lot of new assets coming online and different arbitrage opportunities around the globe. And as we talked about, like in the second quarter, despite all of the kind of platforms that didn't perform that well because of different deleveraging in the system and whatnot, that was actually a really good trading environment for our customers. And so when they're comparing what they can generate from those trading strategies versus what they can earn on excess deposits, even at this interest rate level that we're at today, those 2 things kind of pale in comparison when you look at sort of an annualized return. And so that said, if there aren't those trading opportunities, then of course, they're going to take their deposits and earn their 300 basis points or whatever that they can earn, but it's really difficult to kind of parse those 2 different things. And ultimately, the improved macro environment is ultimately what we think will drive that increased engagement from our customers.

So relative to the stablecoin project timing, you're certainly not the only one out there awaiting regulatory and policymaker clarity. Is there a broader regulatory and policymaker clarity that we should be looking for that might need to happen before your project? Or is it somewhat independent of that?

Yes. It's really -- obviously, it's virtually impossible for us to comment on what others might be waiting for. And from our perspective, the conversations that we're having with our regulators and our policymakers and the broader policymakers are very consistent with some of the public comments that you've seen out there over the last several weeks. Nobody thinks this is going away. Everybody wants to make sure that we've got all -- the industry has all the relevant controls in place and all the things that Ben was talking about earlier. And this kind of reminds me of going all the way back to the mid to late '70s with credit cards and the EFT commission. I mean I've -- as we've been working on this project over the last couple of years, I've gone back and looked at kind of the history of electronic funds transfer and some of the things that are being brought up by Congress, et cetera, as the different stablecoin builds are contemplated. The data points are very similar. And so I'm confident that we're going to get through all of the various questions and get to a point to where we can get something in the market. And as I commented on in my prepared remarks, you go back and look at what the opportunity is here for global payments and the opportunity is just absolutely massive. And it's also the thing that over time will actually separate Silvergate from these kind of micro crypto market volatility, if you will, once we transition to issuing a stablecoin, a tokenized dollar as we're referring to it on the blockchain. And once that is used for payments around the globe, that will really change the complexion of the relatively modest volumes in the crypto markets.

^Operator^ (Operator Instruction] Our next question comes from David Chiaverini of Wedbush Securities.

So I wanted to ask about SEN Leverage. Commitments increased to $1.5 billion, but the balances outstanding are only about $300 million. Curious as to what could drive these outstanding balances higher? Is it bullishness of your investors? Just curious on your commentary as to what could get that higher?

Yes. I think there's a couple of things. One, to your point, when volumes and volatility come back in this ecosystem, I think that will drive borrowing. But also as there's additional kind of stability in the price of Bitcoin as I commented earlier, the volatility in the price of Bitcoin has really gone down. That's not to say we're at the bottom. There could always be another leg down. But some of the customers that are -- that we're working with now, especially in the Bitcoin mining area, there's certainly opportunities for them to draw on their lines as well. And as you may be familiar, the actual Bitcoin hash rate is at all-time highs, notwithstanding the fact that the prices is relatively flat and down quite a bit off of its highs. And that just demonstrates the fact that there's still this Bitcoin network that has been operating uninterrupted with 100% uptime since early 2013. There's no other computer network in the world that can claim that uptime. And so over time, this lending against Bitcoin, we believe the opportunity is massive. And it is a little bit of a bright spot here in this quarter that notwithstanding all of the other metrics that we continue to add customers and continue to grow the SEN Leverage commitment level.

And then a follow-up, can you comment on the competitive environment, SEN volumes down 40%. Are clients using an alternative platform to move money or is this purely overall crypto market headwinds? Just could you comment on the competitive environment?

Yes. We certainly don't have any direct insight into volumes of other banks. But we do track potential transfers of deposits between Silvergate and other banks, and we're just not seeing it. I think it's really more indicative of all the things that Ben mentioned earlier in terms of just lower market volumes and less trading opportunity in the ecosystem.

^Operator^ Our next question comes from Jared Shaw of Wells Fargo.

Our next question comes from [Timo Braziler] of Wells Fargo.

Apologies. (Operator Instructions) We've reconnected with Timo.

This is actually Jared. I guess just following up on last -- we saw Coinbase had an announcement where they're working with another platform to, I think, mint and burn. Is that going to significantly impact the potential for SEN volumes? Or is this just an incremental additional competitive pressure that's sort of been out there overall?

I think just to be clear, the announcement wasn't specific to minting and burning, but just an announcement that they had enabled that competing platform, as you mentioned. And quite frankly, we've expected this for quite some time. One of the things, again going all the way back to 2013, when we first started looking at banking this ecosystem, one of the challenges that exchanges and other market participants were having even back then was just there were relatively few banks banking the ecosystem and therefore, these platforms seek to have redundancy where they can. And so we certainly don't expect to see any significant impact directly related to that announcement on the volumes across the SEN. And as I mentioned, it's something that we've expected. And candidly, I was a little surprised that it wasn't in place already just given the fact that we know that a lot of these exchange platforms like to have that redundancy in place.

And just going back to the sort of shift in deposit focus and bringing on the CDs. How big is a percentage of deposits, I guess, would you be willing to have brokered CDs go or more broadly interest-bearing deposits go? And then have you added any in the third quarter? And sort of what's the term rate of those deposits?

Yes, I'll just go ahead and take this one, Tony. So we don't provide any incremental updates during the quarter, so for that part of that question. And then to the broader question of what percentage of the balance sheet or what percentage of our deposits, certainly, we look at various kind of wholesale strategies, if you will, as they're described, whether that be Federal Home Loan Bank borrowings or brokered CDs or other types of borrowings. And it really just comes back to the comments that I made earlier around balance sheet management and looking at what assets are those borrowings and wholesale funding, what assets are they funding and can we generate a positive spread there, so no specific guidance. And we run a very, as you know, a very liquid balance sheet. And we certainly have the ability to borrow against the securities as we've done in the past. We could certainly sell some of the securities if we had further deposit pressure. But at this point, we're very comfortable with the strategy as it's playing out.

We have no further questions on the phone line, so I'll hand back for any closing remarks.

All right. Thank you, Jordan. So I just want to thank everybody for joining today. And notwithstanding the challenging environment, we remain very optimistic on the long-term opportunities that the platform provides. Our strength of the platform, it's the result of the hard work of our entire team at Silvergate. I want to thank the team. We added another 90-plus customers and we're actively continuing to add customers. So thank you to the Silvergate team. Thank you for all of you who called in, and I hope you have a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.