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Why Signature Bank’s Failure Could Be a Huge Setback for the Crypto Industry

A version of this article was published in TIME’s newsletter Into the Metaverse. Subscribe for a weekly guide to the future of the Internet. You can find past issues of the newsletter here.

As fears of bank failures have spread around the world in the last week, the contagion has threatened to engulf crypto. Signature Bank, crypto’s last major ally in the banking world, was seized by regulators earlier this week in the aftermath of Silicon Valley Bank’s failure. Signature played a key role in the U.S. crypto ecosystem. If no bank steps in to reproduce its services, U.S. crypto growth could slow significantly, some insiders say.

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“The impacts would be really big if there is no U.S. bank that will take on deposits from a crypto client,” says Taylor Johnson, a co-founder of PsyFi, which builds crypto financial products. “It would be very painful, and reduce crypto activity a ton for any U.S. person or business.”

Embracing Crypto

New York-based Signature Bank was not exclusively a crypto bank: it also had a huge hand in real estate lending and law firm services. But during crypto’s pandemic-era bull run, the bank became one of the major legacy institutions to embrace crypto, holding $10 billion in crypto deposits by January 2021. Eric Howell, one of the bank’s executives, bragged at the time that the bank was “the preeminent player in that space.”

Signature Bank also ran the payment system Signet, which allowed crypto companies to instantly transfer money in and out of crypto at all times. Signet played a crucial role in the operational efficiency of several large exchanges, including Coinbase. Since 2019, Signet and its main competitor, Silvergate Bank’s SEN, have been responsible for moving more than $2 trillion in and out of crypto, according to Forbes.

But after the fall of FTX, Signature sought to distance itself from crypto, especially since the exchange platform had been one of its clients. In December, the bank said it would offload $8 billion worth of cryptocurrency in order to reduce its exposure to a turbulent industry.

Signature’s decision was worrying but not back-breaking for crypto, as the industry could still rely on Silvergate Bank, another crypto-friendly institution. But Silvergate was hit hard during crypto’s decline in value last year, and announced on March 9 that it would be winding down operations. Following Silvergate’s demise, JPMorgan predicted that some of its customers would migrate over to Signature Bank. Venture capital investors and crypto executives, meanwhile, told The Information that they were exploring Silicon Valley Bank as another alternate option.

Falling Dominoes

At the end of last week, however, Silicon Valley Bank suffered from a swift bank run after many of its tech start-up clients pulled their deposits amid widespread concern about the bank’s cash balance. The collapse of SVB caused a panic across banks of similar sizes, with depositors rushing to get their money out before it was too late.

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The panic put Signature Bank in the spotlight. It is not yet clear if the bank actually became insolvent 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,” the governmental agency wrote in a statement.

Bloomberg reported that U.S. prosecutors had been investigating Signature’s relationship with crypto clients and potential acts of money laundering before it was seized. (Signet also faces a class-action lawsuit that alleges that the payment system was used in FTX’s fraudulent co-mingling of customer funds.) Signature’s collapse was the third-largest commercial bank failure in U.S. history—and unfolded days after Silicon Valley Bank became the second-largest.

Many in the crypto industry have cried foul, arguing that Signature’s seizure was unnecessary and targeted specifically against them. On Thursday, industry trade group the Blockchain Association announced that it had submitted Freedom of Information Act (FOIA) requests to the FDIC and other regulators, and speculated that government actions might have “improperly contributed” to the bank’s failures.

Crypto insiders also began to worry that Signet would vanish. “Crypto’s banking rails have been effectively shuttered in less than a week. Next up, USDC,” Ryan Selkis, the co-founder of the crypto analysis company Messari, tweeted, referring to the prominent stablecoin. “The message from DC is clear: crypto is not welcome here.”

Jeremy Allaire, the CEO of Circle, which issues USDC, announced that the company would move its settlement processes from Signet onto BNY Mellon and form a partnership with Cross River Bank.

On Wednesday, however, Kevin Greene, the CEO of Tassat, whose technology underpins Signet, told TIME that Signet was operating normally, and predicted that it would continue to do so in the weeks to come despite Signature’s closure. “We’ve got a very robust platform that never goes down and operates around the clock. It doesn’t matter what the markets are doing or what else is happening,” he says.

He noted, however, that “Tassat does not have any role or influence in Signature Bank’s operations.”

Finding Banking Partners

Even if Signet continues to operate, the loss of Signature’s ability to accept crypto deposits remains a major issue. While there are other smaller banks that accept crypto, Signature’s involvement in crypto lent the industry credibility, especially in the face of regulatory rebukes. In January, the FDIC and other financial regulators issued a joint statement warning banks of crypto’s risks to the larger financial system.

Market jitters and regulatory scrutiny will likely deter many banks, especially smaller ones, from taking on the risk and stigma of engaging with crypto at all. Some of those who might have served as backstops have also been hit by this contagion: Customers Bancorp, a relatively crypto-friendly institution, fell 24% on Monday before recovering slightly during the week.

John Lo, managing partner of digital assets at the investment firm Recharge Capital, predicts that the fall of Silvergate and Signature will hit smaller, emerging crypto companies harder than the industry’s major players.

“For crypto institutions, it’s probably a bit easier for them to transition onto the larger banks,” he says. “For smaller crypto projects and startups, their burdens are just as any other startup’s burdens in Silicon Valley. It’s really difficult to find banking providers for nascent, risky industries.”

Johnson, at PsyFi, predicts there will be a handful of “less risk-averse” banks that decide to take on crypto clientele. In the event that doesn’t happen, however, he says it’s likely the number of crypto businesses in the U.S. will dwindle. “If a crypto entrepreneur wants to start something in the U.S. but can’t open a bank account, they’re either going to give up or move their activity offshore,” he says.

Such a situation would also affect retail customers hoping to buy and sell crypto on their own. “If no U.S. bank will take deposits from a crypto client, eventually, exchanges can’t hold U.S. dollars and won’t accept deposits,” he says. “And that’s going to make it a pretty difficult experience for users to onboard onto an exchange.”

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