By Nicholas Larsen, International Banker
As panic levels rose across US financial markets following the sudden collapse of Silicon Valley Bank (SVB), customers withdrew more than $10 million of deposits from Signature Bank on Friday, March 10, prompting a massive run on the New York-based lender and leading to what analysts have labelled the third-largest bank failure in US history. Involving a cryptocurrency-friendly lender and having swiftly followed the liquidation of the similarly crypto-oriented Silvergate Capital, moreover, Signature Bank’s demise has raised concerns in recent weeks over the role that the risky digital-asset sector truly played in precipitating the bank’s downfall and, ultimately, what it all means for the future of crypto.
It should be observed that crypto was far from being Signature Bank’s biggest business, let alone its only one, as its sizeable presences in the real-estate and legal industries demonstrated. Nonetheless, it was considered among the crypto sector’s closest allies within the US banking system over the last few years, particularly when the unprecedented bull run in 2021 saw bitcoin hit nearly $70,000, with Signature being home to around $10 billion in crypto deposits. Indeed, both Signature and Silvergate represented two systemically important lending institutions for the cryptocurrency sector, with both operating hugely popular blockchain systems—Silvergate Exchange Network (SEN) launched in 2017, followed by Signature’s Signet in 2019—that enabled the movement of trillions of dollars to and from major crypto-trading entities.
And once Signature was closed for good, US federal regulators specifically cited concerns over the potential systemic risks posed by the crypto-centric bank. By Sunday, March 12, the New York State Department of Financial Services (NYSDFS) had officially brought the lender under regulatory possession and appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver to market the failed institution to potential bidders. The FDIC’s deposit-insurance fund covered the losses of all depositors, including the many uninsured, at an estimated cost of $2.5 billion. “All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the regulators said. Signature’s equity investors and bondholders have received no such protection, however.
As such, there has been considerable media speculation over just how much of the blame for the collapse of Signature et al. should be placed at the feet of crypto, particularly given that fears were already elevated this year over the extent to which US banks were exposed to the sector following the disastrous November 2022 collapse of cryptocurrency exchange FTX, which was among Signature’s clients. The exchange’s spectacular demise prompted a strategic move by the bank away from the space when it confirmed in December that it would reduce deposits tied to cryptocurrencies by a whopping $8 billion.
And although Silvergate’s eventual shuttering on March 9 did not exactly come as a shock to the market, especially given its longstanding and widely known struggles following last year’s massive crypto-market sell-off that led to a fourth-quarter net loss of nearly $1 billion, total deposits from digital-asset customers falling by some 68 percent to $3.8 billion during the same quarter and layoffs of 40 percent of its workforce announced in January, its eventual closure was pivotal in sparking widespread concerns over banks with significant levels of uninsured deposits—Silvergate, SVB and Signature Bank included.
And following reports on March 15 that the United States Department of Justice (DOJ) was investigating the business activities between Signature and its crypto clients just prior to it being seized by regulators, the daggers have been well and truly out for cryptocurrency in recent weeks. According to Bloomberg, prosecutors were interested in whether the bank carried out adequate due diligence and compliance on such clients, such as sufficiently scrutinising those entities opening Signature accounts and monitoring transactions for signs of criminality and money laundering. Bloomberg also quoted U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler, who confirmed, while Signature was being shuttered, that the regulator “will investigate and bring enforcement actions if we find violations of the federal securities laws”. The DOJ similarly investigated Silvergate’s dealings with FTX and the exchange’s sister company, Alameda Research.
“Digital currency was the new element entered into our system. A new and destabilizing—potentially destabilizing—element is introduced into the financial system. What we get are three failures,” Barney Frank, a former US congressman and key architect of the post-2008 banking-regulation framework overhaul, the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act), told Bloomberg on March 13 when comparing the regulatory landscape today with that during the Global Financial Crisis (GFC). Nonetheless, Frank insisted that today’s much more resilient banking sector will not be broken by the crypto sector. “The negative consequences of that have been unfortunate for some people, but are not systemically problematic.”
But some suspect that the decision to close Signature Bank was part of a broader effort by regulators this year to formally expel crypto from the US banking system altogether. “The regulators are effectively building a wall between crypto trading and the banking and the securities markets to prevent the types of systemic vulnerabilities that led to the 2008 financial crisis,” Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law & Public Policy, told Bloomberg in February.
Barney Frank also said there was no objective reason for Signature to be seized by regulators. “I think part of what happened was that regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the fundamentals,” he told CNBC.
And the Blockchain Association recently confirmed that it was investigating whether crypto firms were being ejected wholesale from US banking. The powerful US crypto-advocacy organisation, with its members including Circle, Ripple and Kraken, has submitted Freedom of Information Act (FOIA) requests to regulators and even suggested that government actions may have “improperly contributed” to Signature Bank’s collapse. “BA’s requests for information from NYDFS seek to understand whether the closure of Signature Bank was the result of the bank’s insolvency or a decision to send an anti-crypto message despite the bank being fully solvent,” the Association stated on its website on April 14.
Nonetheless, crypto proponents will undoubtedly be enthused by the recent findings reached by the NYSFDS. “It is a misnomer that the failure of Signature Bank was related to crypto,” NYSFDS’s superintendent, Adrienne Harris, stated during a U.S. House Committee on Financial Services hearing on stablecoins on April 19. “The outflow of crypto deposits were in exact proportion to the representation in the depositor base overall,” which included wholesale food vendors, fiduciaries, trust accounts and law firms, all of which withdrew their holdings from the bank and triggered the run on Signature.
Signature has also been taken over by New York Community Bancorp (NYCB), with a deal announced on March 19 for subsidiary Flagstar Bank to operate the bank’s 40 branches and a substantial portion of its deposits, loans and other assets. Around $4 billion of Signature’s crypto-related deposits were not included in the sale and initially remained with the FDIC in receivership, however. And with the FDIC having given Signature Bank’s crypto clients until April 5 to close their accounts and move these funds elsewhere, challenges over finding new banking partners have surfaced and are likely to persist in the interim.
Indeed, if the US really is trying to banish crypto from the US banking sector, as many suspect, these entities will be forced to look overseas for banking partners. Such moves could potentially create issues with international money transfers when trying to serve US consumers, according to Owen Lau, an analyst covering exchanges and asset managers for financial-services firm Oppenheimer & Co. “In the climate right now, large banks are unlikely to take on these risks if you’re a smaller crypto company,” Lau explained to Forbes shortly after Signature’s collapse. “The first challenge is finding a banking partner. The second will be connecting these systems together.”
In the meantime, the fallout from the US banking failures is leading to crypto-friendly Swiss banks experiencing major upticks in requests for banking services from these “homeless” crypto firms. “We have been inundated with requests,” an advisor at a private Swiss bank recently told CNBC, while Dominic Castley, the chief marketing officer at Sygnum Bank, confirmed a major influx of enquiries had been observed at the Swiss digital-asset-focused banking stalwart. “Over the past weeks, as the current banking industry events have unfolded, we have seen a significant increase in onboarding enquiries from various international locations,” Castley said, adding that Sygnum’s presence in both Switzerland and Singapore is proving appealing to companies.