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One More Setback for Crypto as Signature Bank Closes

The Treasury Department said that New York State shut down Signature Bank on Sunday and that depositors could get their money back on Monday.

Photo by Tom Butler / Unsplash

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The closing of Signature Bank, a lender with a number of crypto businesses as customers, is a huge setback for digital assets, which are becoming more and more cut off from the financial system.

Signature Bank, which, according to New York's Department of Financial Services, had US$110.36 billion in assets and US$88.59 billion in deposits as of December 31, was taken over by the Federal Deposit Insurance Corporation (FDIC).

All of the depositors of Signature Bank and Silicon Valley Bank will be made whole, and "no losses will be borne by the taxpayer," the US Treasury Department and other bank regulators said in a joint statement.

That closure follows the simultaneous failures of Silvergate Capital and Silicon Valley Bank, which was the second largest in US history behind Washington Mutual, which collapsed during the 2008 financial crisis.

At one point or another, each of these financial institutions was considered one of the most crypto-friendly in the United States.

When they saw how quickly innovation-oriented startups were growing, investors SVB, the 16th largest lender in the US, was toppled by customer withdrawals.

During the incident last week, US banks saw more than $100 billion in market value evaporate, leading government authorities to take immediate action over the weekend to try to restore trust in the financial system.

In the immediate aftermath, fears of a domino effect in the financial industry, digital assets, Wall Street, and the Treasury yield to fall.

Bitcoin had its worst week since November because of a number of things, including a selloff in stocks, worries in the banking sector, and a tightening of regulations in the US.

US Government Calms Nerves

On Sunday, the FDIC set up a "bridge" successor bank so that depositors and withdrawals could continue as usual on Monday. The FDIC said that all depositors and debtors of Signature Bank will be automatically transferred to the bridge bank.

Kathy Hochul, governor of New York, issued a statement on Sunday expressing her optimism that the federal government's efforts will lead to "increased confidence in the stability of our banking system."

"Many depositors at these banks are small businesses, including those driving the innovation economy, and their success is key to New York's robust economy," she said.

After the US government's efforts to calm fears about the stability of the US financial system, Bitcoin saw its largest one-day gain in a month.

After Silicon Valley Bank went bankrupt, US regulators promised to keep all depositors' money safe. They also made it easier for banks to get short-term loans if they were pressed for cash.

This helped the largest cryptocurrency go up by as much as 5.3% to US$21,582, marking the biggest single-day increase since February 15.

New York's banking authorities have announced the closure of Signature Bank while assuring customers that their funds will be safe.

Rachel Lin, the co-founder of SynFutures, a decentralized trading platform for derivatives, told Bloomberg, "The Federal Reserve's rescue plan has boosted market confidence and eased worries about the possible collapse of more players, especially since Signature is a major bank in the crypto industry."

Contagion Risks

With the fall of SVB, digital-asset behemoth Circle Internet Finance, one of the largest issuers of the widely used tokens famed for their apparent stability, announced it had $3.3 billion of reserves with the bank, causing a ripple effect through the critical market for stablecoins.

The revelation also sent a jolt across the market since it led Circle's token, USD Coin, to fall below its planned 1-for-1 peg with the dollar. The price fluctuated between 98 and 99 cents.

Following the FTX exchange's collapse, despite Signature's withdrawal from digital assets, the company still had $16.5 billion in client deposits tied to cryptocurrencies as of March 8th.

Signature and Silvergate not only made it easy for clients like hedge funds and exchanges to make quick transactions, but they also helped the market have more faith in digital assets by making it easy for them to move money quickly between each other.

Coinbase Global, the biggest cryptocurrency exchange in the United States, said on Friday evening that it had $240 million in its bank account.

Paxos Global, which used to work with Binance on the BUSD stablecoin, told Signature that it has $250 million available.

The tweet from Paxos read, "(it) holds private deposit insurance considerably in excess of our cash balance and FDIC per-account restrictions."

Austin Campbell, an adjunct professor at Columbia Business School, said, "Crypto has basically been de-banked, especially for 24/7 fast payments rails." He added that the most likely solution for the crypto is "to look to other jurisdictions going forward."

Pull Back Signature

Pull Back Signature was in charge of the Signet payment network, which allowed businesses to make instant, dollar-based payments around the clock, every day of the week.

After Silvergate's SEN network was shut down at the beginning of March, many crypto users had to use Signet to pay exchanges, merchants, or employees on time.

Before, customers of LedgerX, a crypto derivatives platform, were told to direct domestic wire transfers through Signature rather than Silvergate.

The company behind the USDC stablecoin is Circle Internet Finance, which says it has $3.3 billion in Silicon Valley Bank accounts and transaction and settlement accounts for USDC at Signature.

Circle CEO Jeremy Allaire said on Twitter that the business will switch to using BNY Mellon for settlements rather than Signet for USDC minting and redemption.

Updating the thread on Twitter, Allaire lauded US regulators for jumping in and calming the market.

But the now-famous maxim of Nobuhiro Kiyotaki and John Moore was echoed this week when the second largest stablecoin in the world was caught up in the bankruptcy of a California bank, wrote Andy Mukherjee in an opinion column in Bloomberg.

“Evil,” the economists had claimed in a 2001 lecture, later made available as a paper of the same title, “is the root of all money,” added Mukherjee.

Liquidity Risks in the Crypto Market

Last October, Coinbase implemented Signet, enabling customers to instantly transfer cash.

The stablecoin TrueUSD was incorporated into Signet for quick payments in 2021. In 2020, Signet also began integrating with Fireblocks.

Liquidity in the cryptocurrency market might be severely impacted if Signet suddenly stopped functioning.

As reported by Kaiko, the simplicity of trading Bitcoin to dollars and Bitcoin to tether on various US exchanges has already dropped by 35% to 45% from the beginning of March to Saturday.

The loss of Signature is likely to have a multiplier effect.

On Monday, US stock futures rose, and with them came a rise in the values of key digital assets.

After Silicon Valley Bank failed, US regulators took steps to protect depositors' money and set up a new financial backstop, which gave investors more confidence.

Bitcoin had gained over 3%, trading at over $22,200. In second place, Ether gained more than 2%. There was also a rise in the price of smaller tokens like Solana and Avalanche.

This week will give a clear picture of the actual exposure and fallout from these bank closures.

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