DEEP DIVE INTO SILVERGATE

ABOUT SILVERGATE BANK

Silvergate Capital Corporation is one of the main suppliers of cutting-edge financial infrastructure services and solutions for the expanding digital currency market. Its real-time payments infrastructure, known as the Silvergate Exchange Network, is at the center of a suite of customer-focused finance, lending, and payment solutions. By facilitating the quick expansion of digital currency markets, Silvergate is changing international trade for the future of digital currencies.

Stablecoins, which are now used by crypto aficionados to purchase and sell digital currency, are a new and widely recognized method of moving money that the $16 billion-asset bank, situated in La Jolla, California, aims to develop for the general public. It may establish alliances with major shops who wish to simplify the purchasing process for customers. Along the process, it will need to dispel any unanswered questions regarding the security and reliability of stablecoins, develop and market a product that users will want to use, and determine how to manage reserves and security for the new stablecoin.

In order to further invest in its platform and improve its current stablecoin infrastructure, Silvergate Bank declared on its website that it has acquired intellectual property and other technical assets linked to managing a blockchain-based payment network from the Diem Group ("Diem").

This announcement was made on the 31st of January, 2022 also with the claims that “Silvergate is in a great position to take advantage of this technology and further establish itself as the market leader for digital currencies.”

ABOUT DIEM

Diem, a stablecoin created by Facebook employees, and its massive originator, now known as Meta, were further separated when Silvergate Capital, the parent company for Silvergate Bank, purchased the technological assets of Diem on January 31 for $182 million. As suggested by American policymakers, this places the token firmly under the authority of a bank that is regulated.

The development of a blockchain and a virtual currency called Libra for all Facebook users was announced by Facebook in June 2019. The social media technology business would operate the network, create and utilize the Libra cryptocurrency, and market it as a method for unbanked individuals to access the financial system.

The concept of a U.S. technology business managing a digital currency was opposed by regulators all around the world and the US Congress. By establishing a consortium to manage it and renaming it Diem, Facebook attempted to dissociate itself from the idea. In May 2021, the Diem Association and Silvergate Bank collaborated to establish a permissioned, dollar-pegged stablecoin, with Silvergate serving as the token's issuer and reserve manager and the Diem Association as the token's administrator as they ran the network's underlying blockchain in test mode.

Regulators weren't satisfied despite Meta's efforts to disassociate itself from Diem. Diem Networks US CEO Stuart Levey stated before announcing the sale of Diem's assets to Silvergate that "although giving us favourable substantive comments on the network architecture, it still became evident from our interaction with federal authorities that the project could not proceed further." The President's Working Group's report on stablecoins from November made it clear that U.S. authorities intended to see stablecoin operations integrated into the financial structure.

The blockchain and stablecoin created by Facebook (formerly known as Meta) are now supported by technology and intellectual property owned by Silvergate Capital Corp., which plans to launch the new digital currency before the end of the year. Silvergate has since then oversaw both the blockchain and the stablecoin.

CHALLENGES FACED BY SILVERGATE SINCE ACQUISITION OF DIEM

A persistent issue is regulation. Numerous measures that will impact stablecoins' future are now before Congress. Stablecoins should be regulated, according to Gary Gensler, the chairman of the Securities and Exchange Commission, and other bank regulators, although no particular regulations have yet been released. Policymakers have frequently discussed the subject of how issuers should reserve against stablecoins. Some stablecoins have come under fire for not completely supporting their virtual currency with real money. A regulator will be concerned if the stablecoin has less than 100% support, according to Routledge.

The structure for reserves was created by Silvergate and the Diem Association, and the bank is currently reviewing it with authorities. To support the stablecoins, the strategy calls for acquiring Treasury notes. These Treasury notes would be kept in a Silvergate trust firm subsidiary. Silvergate updated their request for a trust company charter with the New York Department of Financial Services in December. That would imply that the firm administering the app would have bought the tokens from us if you had acquired dollar tokens produced by Silvergate through one of the applications on your phone, Lane explained. And we would have used those funds to buy Treasury bonds and deposit them in a trust account on your behalf at our trust business subsidiary. As a result, they would be backed one for one, but not by cash in a safe per se, but rather by US Treasury bonds held at the trust business.

One of the reasons Silvergate has been moving slowly, according to him, is regulatory worry. Lane stated, "We move quite quickly for a bank, but we don't move as quickly as Internet businesses." Moving quickly and breaking things is an old saying in technology, but it doesn't apply to banking. The fact that we've been working on this for a while shows how patient we are. Lane expressed his "relief" that regulators are considering all the possible hazards associated with stablecoins before the introduction of Diem's successor.

Routledge noted that creating a stablecoin that is compatible with several blockchains has security concerns as well. The platforms that link blockchains have been hijacked by hackers in a few recent breaches, such as the $UST/Luna and the $323 million loss of Ether from the cross-chain protocol Wormhole. The Solana and Ethereum blockchains are connected through “Wormhole”.

PROMISING EFFECTS OF DIEM’S ACQUISITION BY SILVERGATE

As said earlier, Diem was purchased for $182 million, and as part of the deal, 1,221,217 shares of Class A common stock and $50 million in cash were issued. According to the business, the purchase would promote Silvergate's technology and strengthen its stablecoin infrastructure effort. Development, implementation, and operations infrastructure as well as tools for running a blockchain-based payment network intended to speed up payments for eCommerce and cross-border transactions are among the resources that Silvergate has purchased.

On the plus side, recent research from Wedbush Securities analysts suggested that Silvergate would profit from having collaborated with all of the retail and tech companies that are Diem Association members. Uber, Lyft, Spotify, and Square are a few of these. The experts said that due to the bank's ownership, Silvergate may be able to charge greater transaction fees and give its stablecoin a competitive edge over rivals.

A group of engineers spent the last two years constructing the network, which has been in use as a test environment. According to the business, it claims to be safe, dependable, and scalable. Proprietary software necessary to maintain a stablecoin network that complies with regulations is also covered by the agreement. Through the cooperation with Diem, Silvergate was able to familiarize itself with the network and appreciate its potential for supporting a stablecoin that would improve the future of international payments.

CONCLUSION

With the assistance of a California-chartered and Federal Reserve member bank like the Silvergate Bank, a corporate subsidiary, Silvergate Capital intends to use the acquired assets as leverage to create its own stablecoin.

In response, the business said:

“To further empower them to move money without restrictions, we noticed a need for a U.S. dollar-backed stablecoin that is regulated and extremely scalable. It is still our goal to meet this need by introducing a stablecoin in 2022, made possible by the assets we bought today and our current technology.”

ABOUT PONTEM NETWORK

A product development company called Pontem is promoting blockchain-based global financial inclusion. Together with Aptos, Pontem is creating the fundamental dApps and other infrastructure needed for adoption of their L1. Examples of this infrastructure include development tools, EVMs, AMMs, and more.

Pontem has a competitive edge in the expanding ecosystem of Move-based, inclusion-focused infrastructure. Pontem staff have accumulated extensive Move knowledge over the last four years. As a team, Pontem realized it had to be "first Mover" on creating a Move Virtual Machine to broaden the use of this amazing technology after working first-hand with the technology created by Meta and Diem engineers. Pontem believe it is not just well-positioned for the future but also in a unique position to produce it because the skill set of its team members includes the fundamental building blocks for contemporary blockchain development.

Pontem will therefore establish the first product development studios for the Aptos Blockchain across three crucial verticals: protocols, developer tools, and infrastructure, given the unique position we are in. By creating the fundamentally simple dApps required for the Aptos L1 to be utilized by billions of people, we will contribute to the growth and development of this emerging ecosystem and capture value throughout the technological stack.

To stay updated on our work, be sure to follow Pontem on Twitter, subscribe on Medium, and connect with us on Telegram.