Signature Bank takeover could leave crypto firms scrambling

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After the cryp­to-friend­ly Sil­ver­gate announced it would be vol­un­tar­i­ly liq­ui­dat­ing amid a cap­i­tal­iza­tion cri­sis, blockchain com­pa­nies rushed to one of the last U.S. banks that would offer finan­cial ser­vices to the volatile industry—New York-based Sig­na­ture Bank.

On Sun­day, two days after the stun­ning fail­ure of Sil­i­con Val­ley Bank, the New York Depart­ment of Finan­cial Ser­vices announced it had tak­en pos­ses­sion of Sig­na­ture, which has deposits total­ing $88.59 billion.

In a joint state­ment, the Trea­sury, Fed­er­al Reserve, and FDIC announced a sys­temic risk excep­tion for Sig­na­ture, guar­an­tee­ing that all depos­i­tors to the insti­tu­tion would be made whole, with no loss­es incurred by taxpayers.

“The U.S. bank­ing sys­tem remains resilient and on a sol­id foun­da­tion, in large part due to reforms that were made after the finan­cial cri­sis that ensured bet­ter safe­guards for the bank­ing indus­try,” the state­ment read. “Those reforms com­bined with today’s actions demon­strate our com­mit­ment to take the nec­es­sary steps to ensure that depos­i­tors’ sav­ings remain safe.”

A weekend of contagion

Friday’s fail­ure of Sil­i­con Val­ley Bank, the first of an FDIC-insured insti­tu­tion since 2020, set off fears of con­ta­gion in the finan­cial sys­tem. Like Sil­ver­gate, SVB had a con­cen­trat­ed deposit base, most­ly serv­ing the tech indus­try, where­as Sil­ver­gate catered to cryp­to firms. 

Even though SVB didn’t have many clients in the cryp­to space, its fail­ure still had an imme­di­ate impact on the sec­tor, with Circle—the issuer of the sta­ble­coin USDC—holding $3.3 bil­lion of the token’s back­ing with the bank, rep­re­sent­ing 8% of its reserves. USDC wavered against its peg through­out the week­end, drop­ping below 90 cents at times on major exchanges. 

Still, Signature—which had emerged as the new safe haven for cryp­to com­pa­nies such as Coinbase—remained oper­a­tional. Even as its stock plum­met­ed, halt­ing trad­ing of its shares on Fri­day, bank­ing experts told For­tune that Sig­na­ture seemed to have more sol­id fun­da­men­tals thanks to its more diverse deposit base. Unlike Sil­ver­gate and SVB, Signature—as well as oth­er banks that appeared to be tee­ter­ing, such as First Republic—also served every­day customers.

Sunday’s announce­ment from the NYDFS and the three fed­er­al bank­ing reg­u­la­tors illus­trates how quick­ly the sit­u­a­tion devolved. The week­end saw many in the tech indus­try, as well as finan­cial lumi­nar­ies such as for­mer Trea­sury Sec­re­tary Lar­ry Sum­mers, call­ing for depos­i­tors at SVB to be made whole to avoid fur­ther spread­ing panic.

Although Trea­sury Sec­re­tary Janet Yellen insist­ed that there would be no gov­ern­ment bailout of SVB, reg­u­la­tors raced to find a solu­tion, includ­ing ini­ti­at­ing an auc­tion for the failed bank, with bids due by Sun­day afternoon.

The extra­or­di­nary state­ment on Sun­day evening sig­naled that the agen­cies had found a way to pro­tect depos­i­tors and stem the exo­dus of funds as con­fi­dence wavered in small­er banks—all with­out using tax­pay­er funds.

For cryp­to com­pa­nies part­ner­ing with Sig­na­ture, the announce­ment brings imme­di­ate relief that their deposits will be pro­tect­ed, but still leaves the open ques­tion of where they will be able to find bank­ing ser­vices. Sig­na­ture was not only one of the last banks to offer ser­vices to cryp­to com­pa­nies, but also ran the pop­u­lar real-time pay­ments proces­sor SigNet. Cir­cle CEO Jere­my Allaire announced that it would be able to use the net­work for mint­ing and redeem­ing USDC, instead rely­ing on set­tle­ments through BNY Mel­lon.

Coin­base said it would con­tin­ue to oper­ate as usu­al and that client cash trans­ac­tions would be facil­i­tat­ed with oth­er bank­ing part­ners. A Pax­os spokesper­son told For­tune that the cryp­to firm cur­rent­ly holds $250 mil­lion at Sig­na­ture as well as pri­vate deposit insur­ance, adding that it was always look­ing to expand its net­work of banks. 

For now, it is unclear what types of finan­cial insti­tu­tions will part­ner with cryp­to com­pa­nies. Reg­u­la­tors have repeat­ed­ly warned of liq­uid­i­ty risks cre­at­ed by cryp­to clients to the bank­ing sec­tor in the wake of FTX’s col­lapse, and the fail­ure of Sil­ver­gate and Sig­na­ture will like­ly keep oth­er firms at arm’s length. With Sig­na­ture now in pos­ses­sion of NYDFS, the indus­try is run­ning out of options.

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