Collapse of signature, Silvergate could create problems with crypto liquidity as banks shy away from purchases

by Arthur · March 14, 2023

By Anushree Dave and Frances Yue

The closure of New York-based Signature Bank, which has a number of crypto clients, is likely to reverberate across the digital asset industry, days after California’s Silicon Valley Bank collapsed in the second-largest bank failure in US history, and Silvergate Bank, another crypto-friendly bank, said it would liquidate.

For years, relations with banks have been difficult for crypto companies. Banks have traditionally been reluctant to work with digital assets, in part because of a lack of regulation in the sector, industry participants said.

Silvergate Bank (SI) and Signature Bank (SBNY) were both, at least at one point, seen as among the most crypto-friendly banks in the US, although Signature had cut its crypto-related deposits after the collapse of the FTX exchange in November.

The collapse of Signature and Silvergate could make it more difficult for institutions to buy cryptocurrencies with fiat currencies, according to Gracy Chen, CEO of crypto derivatives exchange Bitget.

The bank failures are also likely to affect market participants’ ability to move capital between trading venues, thereby limiting liquidity across crypto trading platforms, especially during non-US banking hours, said David Wells, CEO of Enclave Markets, a digital asset trading firm. .

Both Signature and Silvergate provided real-time payment networks, called Signet and SEN respectively, which enabled their customers to send money in US dollars 24/7 to each other.

“I don’t expect a rush from any banking partners to launch a 24/7 money movement solution like SEN and Signet, as that was likely why Silvergate and Signature were heavily scrutinized,” Wells said in an email.

Crypto exchange OKcoin said on Monday that it has temporarily suspended deposits in US dollars via wire transfer, along with ACH, a type of electronic bank-to-bank payment, and over-the-counter services.

“Signature is our primary USD bank for customer transactions,” Hong Fang, CEO of the exchange, wrote on Twitter on Monday. “Our team is working very hard on alternative channels and real-time solutions.”

The main off-ramps to fiat currencies from crypto are essentially gone now, following the closure of Silvergate and Signature, said Stefan Rust, CEO of Truflation.

Crypto companies will be forced to move to “systemically important banks” such as JP Morgan, Barclays and Nomura, Rust said in emailed comments. “However, with regulators like the US SEC making life increasingly difficult for cryptocurrency firms, this may not be easy or possible for many,” Rust said.

In January, federal regulators issued a statement warning banks to beware of “significant” risks surrounding crypto assets.

Denelle Dixon, executive director of the Stellar Development Foundation, said she remains a “believer in the fact that banks are accessible to the crypto industry.”

Banks want to work with companies that have thought about their governance and are well-run businesses, Dixon said in an interview. “It’s no different from crypto to other industries,” according to Dixon.

Despite concerns about digital asset companies’ relationships with banks, major cryptocurrencies rallied on Tuesday. Bitcoin rose 18% to over $26,000, according to CoinDesk data. The largest cryptocurrency is still down over 60% from its record high.

-Anushree Dave

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03-14-23 0918ET