The banking crisis hit the United States (US) last week. The crisis started with one of the banks, namely Silicon Valley Bank (SVB), which made a lot of people excited on Friday last week.
The crisis from SVB also affected major US banks such as Signature Bank, Silvergate Bank, and most recently, First Republic Bank. In fact, the contagion of the banking crisis in the US impacted Europe. The second largest bank in Switzerland, namely Credit Suisse, was also hit by a crisis that could lead to the downfall of this legendary bank. But in fact, Credit Suisse has often stumbled on problems in recent years.
The banking crisis in the US also made market players worried that this was the impact of high central bank interest rates. Not only that, SVB, which has become banks for startups in the US and even a bank for the crypto industry, has made digital assets invisible to many people again.
accept deposits from crypto clients,” said Taylor Johnson, co-founder of PsyFi, which makes crypto-finance products. “That would be very painful, and drastically reduce crypto activity for any US person or business, Johnson added.
New York-based Signature Bank is not only a crypto bank, but also has a big hand in real estate lending and law firm services. But during the bull run of the crypto pandemic era, Signature Bank became one of the main legacy institutions to embrace crypto, holding US$10 billion in crypto deposits as of January 2021.
Signature Bank also runs the Signet payment system, which allows 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, SEN Silvergate Bank, have been responsible for moving more than US$2 trillion in and out of crypto, according to data from Forbes.
But after the collapse of the world’s second largest crypto exchange, FTX, Signature has been trying to distance itself from crypto, especially since the exchange platform has become one of its clients. In December 2022, Signature Bank said it would offload US$8 billion worth of crypto to reduce its exposure to a volatile industry.
Signature’s decision is worrying but not detrimental to crypto, as the industry can still rely on Silvergate Bank, a bank for other cryptos. However, Silvergate was hit hard during the crypto’s downturn last year, and announced on March 9 that it would be ceasing operations.
Following Silvergate’s death, JPMorgan predicts that some of its customers will migrate to Signature Bank. Meanwhile, venture capital investors and crypto executives told The Information they were exploring SVB as another alternative option.
At the end of last week, SVB suffered from massive and rapid withdrawals after many of its tech start-up clients withdrew their deposits amid widespread concern about bank cash balances. The SVB’s collapse caused bank-wide panic of equal measure, with depositors rushing to withdraw their money before it was too late.
Panic threw Signature Bank into the spotlight. It is not yet clear whether banks have actually gone bankrupt 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 leadership.”
Bloomberg reported that US prosecutors had investigated Signature’s ties to crypto clients and potential money laundering actions prior to their impoundment. the reason that the seizure of Signatures is unnecessary and targeted specifically against them.
Last Thursday, industry trade group the Blockchain Association announced that it had filed a Freedom of Information Act (FOIA) request with the FDIC and other regulators, and speculated that the government’s actions may have “improperly contributed” to bank failures.
Crypto insiders are also starting to worry that Signet might disappear.
“The crypto banking rail has effectively closed in less than a week. Next, USDC,” tweeted Ryan Selkis, co-founder of crypto analysis firm Messari, referring to the leading stablecoin. Jeremy Allaire, CEO of Circle, which issued USDC, announced that the company will move its settlement process from Signet to BNY Mellon and form a partnership with Cross River Bank.
If Signet continues to operate, the loss of Signature’s ability to accept crypto deposits remains a major problem. While there are other, smaller banks that are still willing to accept crypto, Signature’s involvement in the crypto industry gives the industry credibility, especially in the face of regulatory rebukes.
In January, the FDIC and other financial regulators issued a joint statement warning banks about the risks cryptocurrencies pose to the larger financial system. Market jitters and regulatory scrutiny will likely dissuade many banks, especially smaller ones, from taking on the risk and stigma of being involved with crypto at all.
John Lo, digital asset management partner at investment firm Recharge Capital, predicts that the fall of Silvergate and Signature will hit smaller and emerging crypto companies harder than the industry’s major players.
“For large crypto institutions, it might be a bit easier for them to switch to a bigger bank. But for those who are still in smaller crypto projects or startups, their burden is the same as that of any other startup in SVB. It’s very hard to find a provider banking for a nascent and risky industry,” said Lo, quoted from Majalan Time.
Such a situation will also affect retail customers hoping to buy and sell crypto themselves.
“If no US bank is going to take deposits from crypto clients, eventually, exchanges can’t hold US dollars and won’t accept deposits. And that’s going to make for quite a difficult experience for users to get into the exchange,” said Lo.
