Why Signature Bank’s failure worries the crypto industry

Why Signature Bank’s failure worries the crypto industry

A version of this article was published in TIME’s Into the Metaverse newsletter. Subscribe to a weekly guide to the future of the Internet. You can find previous editions of the newsletter here.

As fears of bank failure have spread across the world in the past week, the contagion has threatened to engulf crypto. Signature Bank, crypto’s last major ally in the banking world, was seized by regulators earlier this week in the wake of Silicon Valley Bank’s failure. Signature played a key role in the US crypto ecosystem. If no bank steps in to replicate its services, US crypto growth could slow significantly, some insiders say.

“The consequences will be very big if there is no US bank that will take deposits from a crypto client,” said Taylor Johnson, co-founder of PsyFi, which builds crypto-financial products. “It would be very painful and reduce crypto activity a ton for any American person or business.”

Embracing crypto

New York-based Signature Bank wasn’t exclusively a crypto bank: it also had a big hand in real estate lending and law firm services. But during crypto’s pandemic-era bull run, the bank became one of the major legacy institutions to embrace crypto, holding $10 billion in crypto deposits by January 2021. Eric Howell, one of the bank’s executives, boasted at the time that the bank was “the premier player in that area.”

Signature Bank also operated the Signet payment system, which enabled crypto companies to instantly transfer money in and out of crypto at any time. Signet plays a critical role in the operational efficiency of several major exchanges, including Coinbase. Since 2019, Signet and its main competitor, Silvergate Bank’s SEN, have been responsible for moving more than $2 trillion in and out of crypto, according to Forbes.

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But after the FTX fall, Signature tried to distance itself from crypto, especially since the exchange platform had been one of its customers. In December, the bank said it would offload $8 billion in cryptocurrency to reduce exposure to a turbulent industry.

Signature’s decision was worrisome but not retrograde for crypto, as the industry could still rely on Silvergate Bank, another crypto-friendly institution. But Silvergate was hit hard during crypto’s devaluation last year, announcing on March 9 that it would wind down operations. After Silvergate’s demise, JPMorgan predicted that some of its clients would migrate to Signature Bank. Meanwhile, venture capital investors and crypto executives told The information that they explored Silicon Valley Bank as another option.

Falling dominoes

Late last week, however, Silicon Valley Bank suffered a quick bank run after many of its tech startup customers withdrew their deposits amid widespread concern about the bank’s cash holdings. The collapse of SVB created panic across similarly sized banks, with depositors rushing to get their money out before it was too late.

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The panic put Signature Bank in the spotlight. It is not yet clear whether the bank actually became insolvent during this crisis. Regardless, the New York State Department of Financial Services seized Signature after it “failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s management,” the state agency wrote in a statement.

Bloomberg reported that US prosecutors had been investigating Signature’s relationship with crypto clients and potential money laundering activities before it was seized. (Signet also faces a class-action lawsuit alleging that the payment system was used in FTX’s fraudulent commingling of customer funds.) Signature’s collapse was the third-largest commercial bank failure in U.S. history—and came days after Silicon Valley Bank became the second largest.

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Many in the crypto industry have cried foul, claiming that Signature’s seizure was unnecessary and targeted specifically at them. On Thursday, the industry trade group Blockchain Association announced that it had submitted Freedom of Information Act (FOIA) requests to the FDIC and other regulators, speculating that the authorities’ actions may have “improperly contributed” to the bank’s failure.

Crypto insiders also began to worry that Signet would disappear. “Cryptos bank rails has been effectively closed in less than a week. Next up, USDC,” tweeted Ryan Selkis, co-founder of crypto analytics firm Messari, referring to the prominent stablecoin. “The message from DC is clear: crypto is not welcome here.”

Jeremy Allaire, CEO of Circle, which issues USDC, announced that the company would move its settlement processes from Signet to BNY Mellon and form a partnership with Cross River Bank.

On Wednesday, however, Kevin Greene, CEO of Tassat, whose technology underpins Signet, told TIME that Signet was operating normally and predicted it would continue to do so in the coming weeks despite Signature’s shutdown. “We have a very robust platform that never goes down and operates around the clock. It doesn’t matter what the markets do or what else happens, he says.

However, he noted that “Tassat has no role or influence in Signature Bank’s operations.”

Find banking partners

Although Signet continues to operate, the loss of Signature’s ability to accept crypto deposits remains a major concern. While there are other smaller banks that accept crypto, Signature’s involvement in the crypto industry gave it credibility, especially in the face of regulatory reprimands. In January, the FDIC and other financial regulators issued a joint statement warning banks about the crypto risk to the larger financial system.

Market turmoil and regulatory scrutiny are likely to deter many banks, especially smaller ones, from taking on the risk and stigma of getting involved with crypto at all. Some of those who may have acted as backstops have also been affected by this contagion: Customers Bancorp, a relatively crypto-friendly institution, fell 24% on Monday before recovering slightly during the week.

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John Lo, managing partner for digital assets at investment firm Recharge Capital, predicts that the fall of Silvergate and Signature will hit smaller, emerging crypto companies harder than the industry’s big players.

“For crypto institutions, it’s probably a bit easier for them to transition to the bigger banks,” he says. “For smaller crypto projects and startups, their burdens are just like any other startup’s burdens in Silicon Valley. It’s really hard to find bank providers for nascent, risky industries.”

Johnson, at PsyFi, predicts that there will be a handful of “less risk-averse” banks that decide to take on the crypto clientele. In the event that doesn’t happen, however, he says it’s likely that the number of crypto businesses in the U.S. will decline. “If a crypto entrepreneur wants to start something in the US but can’t open a bank account, they’re either going to give up or move the activity offshore,” he says.

Such a situation will also affect retail customers hoping to buy and sell crypto on their own. “If no US bank will take deposits from a crypto client, eventually exchanges cannot hold US dollars and will not accept deposits,” he says. “And that’s going to make it a pretty difficult experience for users to get on board an exchange.”

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