Signature bank shutdown deals another blow to the crypto industry

by Arthur · March 12, 2023

(Bloomberg) — The closure of Signature Bank, a lender that counted a number of crypto companies as clients, marks another major setback for digital assets as the industry becomes increasingly cut off from the banking system.

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The Treasury Department said Signature Bank was shut down by New York state regulators on Sunday and that depositors will have access to their money on Monday.

The closure comes shortly after the twin collapses of Silvergate Capital Corp. and Silicon Valley Bank. All of the banks were, at least at one point, considered among America’s most crypto-friendly financial institutions.

Signature had begun pulling back from digital assets in the wake of the FTX exchange implosion, but still had $16.5 billion in crypto-related client deposits as of March 8. Signature and Silvergate also enabled fast payments between clients such as hedge funds and exchanges, supporting liquidity in digital assets.

Coinbase Global Inc., America’s largest crypto exchange, said Friday night that it had a balance of $240 million in the bank. Paxos Global, which previously partnered with Binance on the BUSD stablecoin, said it had $250 million on Signature. In the tweet, Paxos said it “holds private deposit insurance well beyond our cash balance and FDIC per account limits.”

“Crypto has basically been de-banked, especially for 24/7 fast payment rails,” said Austin Campbell, an assistant professor at Columbia Business School. He added that the most likely solution for the crypto is “to look to other jurisdictions going forward.”

Pull back

Signature operated Signet, a payment network that allowed commercial crypto clients to make real-time payments in dollars at any time, seven days a week.

After the shutdown of rival Silvergate’s SEN network in early March, Signet was the only game in town for many crypto customers when it came to quickly sending payments to exchanges and suppliers, or meeting payroll. LedgerX, a crypto derivatives platform, previously instructed clients to send domestic wire transfers to Signature instead of Silvergate.

Circle Internet Financial Ltd., the issuer of the USDC stablecoin, has said it has $3.3 billion with Silicon Valley Bank and maintains transaction and settlement accounts for USDC with Signature. Circle CEO Jeremy Allaire tweeted that the company will not be able to process the minting and redemption of USDC through Signet and will rely on settlement through BNY Mellon.

Signet System

Coinbase integrated Signet to allow clients to instantly transfer funds last October.

Back in 2021, stablecoin TrueUSD was integrated into Signet for instant settlement. Signet also integrated with Fireblocks in 2020.

If Signet goes out of commission, users may have trouble getting in and out of exchanges quickly, dramatically affecting crypto market liquidity.

Already, tradeability for Bitcoin-to-dollar and Bitcoin-to-Tether transactions on some US exchanges has dropped between 35% and 45% from early March to Saturday, according to research firm Kaiko. Signature’s collapse is likely to increase its effect.

Prices of major digital assets climbed on Monday alongside a jump in US stock futures. US regulators have moved to protect depositors’ funds after the collapse of Silicon Valley Bank and created a new financial backstop, boosting investor sentiment.

Bitcoin, the largest token, rose more than 3% to trade at around $22,200 at 7:58 a.m. in Singapore on Monday. Second-ranked Ether climbed over 2%. Smaller tokens like Solana and Avalanche were also higher.

For crypto market prices: CRYP; for the best crypto news: TOP CRYPTO.

–With assistance from Muyao Shen and Beth Williams.

(Updates details of Coinbase and Paxos exposure in fifth paragraph and with commentary from adjunct professor in sixth paragraph.)