Spring Cleaning for Alternative Banks as Crypto-Friendly Signature Bank Closes

Crypto’s founding premise was to de-bank the world and remove third-party risk.

Now, the digital asset industry is finding itself the one unbanked, as financial institutions that once catered to crypto players increasingly shutting down one by one.

This, as just days after the far-reaching collapse of the tech startup focused Silicon Valley Bank (SVB) and the liquidation of crypto-catering Silvergate Bank, the crypto-friendly lender Signature Bank Sunday (March 12) was closed down by regulators to stave off a banking crisis.

It marks the third bank collapse in just five days.

New York-based Signature Bank, which has 40 branches across New York, California, Connecticut, North Carolina and Nevada and originally focused on commercial real estate, became one of the few banks to welcome cryptocurrency deposits in 2018.

The bank had relationships with Circle, Coinbase, Kraken and other major crypto players.

After regulators seized SVB, Signature became one of the many midsize banks that found itself facing a crisis of confidence. The bank was also reeling from its bet on banking a crypto industry that had begun to flounder after a series of implosions last year.

Another Major Setback for the Cryptocurrency Industry

Signature’s woes mark another major setback for digital assets as the crypto industry loses yet another of its last remaining on-ramps to the traditional banking system.

Signature ran a proprietary payment network called Signet that allowed commercial crypto clients to make real-time payments (RTP) 24/7.

After the shutdown of bank rival Silvergate, Signature’s Signet network was the only option available for many crypto businesses to quickly send payments to exchanges, vendors or even for administrative needs like meeting payroll.

The essential de-banking of crypto from 24/7 RTP rails may leave the industry with little option but to look to other geographies and jurisdictions, according to sector observers.

While Signature had begun to pull back from crypto after the implosion of FTX, it still held sizable deposits from some of the sector’s biggest names.

“As of close of business Friday March 10 Coinbase had an approximately $240m balance in corporate cash at Signature. As stated by the FDIC, we expect to fully recover these funds,” the US-based crypto exchange Coinbase said in a public tweet.

As of close of business Friday March 10 Coinbase had an approximately $240m balance in corporate cash at Signature. As stated by the FDIC, we expect to fully recover these funds. https://t.co/XY5L7m4RMs

— Coinbase ?️ (@coinbase) March 12, 2023

Paxos Global, which as reported by PYMNTS recently had its Binance-branded BUSD stablecoin shut down by the NYDFS, also tweeted that it held a quarter of a billion dollars at Signature Bank.

“Paxos currently holds $250M at Signature Bank and holds private deposit insurance well in excess of our cash balance and FDIC per-account limits. Seeking private deposit insurance is part of our conservative approach to managing customer assets exceeding FDIC insurance limits,” the company tweeted.

Banking Activities To Resume Today for Signature Customers

“To protect depositors, the FDIC transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders,” reads a statement by the U.S. Federal Deposit Insurance Corporation (FDIC) announcing Signature’s closure by the New York State Department of Financial Services (NYDFS), which appointed the FDIC as receiver.

A joint action by the Federal Reserve and Treasury Department, announced Sunday (March 12), took the unique step of designating both SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to backstop uninsured deposits.

The FDIC-established entity, Signature Bridge Bank, resumed activities today (March 13).

Signature Bank customers will continue to have “access to their funds by ATM, debit cards, and writing checks in the same manner as before. Signature Bank’s official checks will continue to clear. Loan customers should continue making loan payments as usual,” according to the FDIC statement.

The domino-effect closings underscore the challenges faced by small and midsize banks focused on niche lines of business to compete with larger institutions like JPMorgan Chase or BNY Mellon.

The niche focus leaves them especially vulnerable to bank runs, as their customer bases are narrower and generally more homogenous – making them likely to all behave the same way in the face of a crisis.