Crypto market players expressed unease on Monday following the seizure over the weekend of Signature Bank, a crypto-friendly New York regional bank, just days after crypto-focused bank Silvergate Capital wound down its operations and U.S. regulators shuttered Silicon Valley Bank.
“Signature Bank’s closure serves as a one-two punch as worries mount over the vulnerability of any bank with exposure to the crypto industry,” Francesco Melpignano, CEO of Kadena Eco, told TechCrunch+. “With only a small number of publicly traded banks having ties to the crypto space, many investors are scrambling to place bets against them.”
Signature, known as one of the largest crypto lenders, was the second casualty from the ongoing banking crisis in the U.S., but regulators said that its customers will be made whole, meaning the government is stepping in to protect the economy from further damage.
Signature Bank had 40 branches across New York, California, Connecticut, North Carolina and Nevada. As of December 31, 2022, the bank had $110.4 billion in total assets and total deposits of $82.6 billion. Around 30% of the bank’s deposits came from the crypto industry.
The crypto industry needs to watch closely for deposit flight from regional banks over the next week, Tegan Kline, chief business officer and co-founder of Edge & Node, said. “If it gets worse, the regulators have a tremendous problem on their hands. Many regional banks may have to close.”
The closures of SVB and Signature will “send shock waves through the tech industry” and most likely will create a “chill to the overall market, making equity capital even more scarce than it already is,” Melpignano said.
But these obstacles aren’t new to the crypto space as the ecosystem “spent a decade ‘unbanked,’” Kline said. “We are used to this. It just means we spend time and resources having to look for alternatives, of which there are still many. It also means innovation continues going overseas.”
While crypto purists like to follow the ethos of being “unbanked,” this situation is less than ideal for companies in the space.
“Losing access to 24/7 fiat movements will impact market-makers’ ability to move capital between trading venues,” David Wells, CEO of Enclave Markets, said. Liquidity will likely be impacted across crypto trading platforms, especially ones with on- and off-ramps that operate during non-U.S. banking hours, like nights and weekends, Wells added. “I don’t expect a rush from any banking partners to launch a 24/7 funds movement solution.”
In general, banking will face broader investigations and scrutiny over the next several months, Youwei Yang, chief economist at BTCM, said. Looking back at the 2008 banking crisis, Bear Stearns went bankrupt in March, and Lehman Brothers broke down in September of that year. “The domino effect could still go on, even with proper treatment,” Yang said.
Separately, other regional banks that would normally serve as fiat ramps for crypto platforms are likely to face a lot of pressure to de-risk operations, so they don’t end up in the same category as Silvergate and Signature, Wells added. “That said, this is an opportunity for healthy banks to take significant market share if they have the appetite to support trading platforms and market-makers.”
“Many of the seamless on- and off-ramp solutions, especially consumer-friendly ones like using a credit card, have already been curtailed,” Kline said. “For more sophisticated folks, the on- and off-ramps persist. Exchanges like Coinbase are not going away, at least for now.”
Silvergate and Signature serve as cautionary tales for servicing crypto fund flows, but it’s unclear how much other crypto-friendly banks will pull back from participating, Wells said.
Crypto companies and participants alike “will go more bankless and use on-chain solutions,” Kline said. “We are looking for more innovation around a liquid decentralized stablecoin.”
As the stablecoin market restabilizes after USDC depegged from its $1 standard, there’s also a chance for heavier reliance on using tokenized fiat — like stablecoins — to enter the market, as opposed to traditional on-ramps like banks.
“Through all this, crypto continues to work — Bitcoin and Ethereum blockchains are operating like they always have,” Kline said. “To see Bitcoin and Ethereum stabilize over $20,000 and $1,500 in the face of all that has happened in the last year is remarkable.”
