Crypto has gone off the rails – quite literally.
Just not in the way industry observers and critics may have first thought or expected.
Rather, the developing banking crisis that felled Silicon Valley Bank (SVB) and Signature Bank, and forced Silvergate Bank to self-liquidate, has similarly hamstrung the digital asset industry’s main payment rails.
Almost all of the household names in crypto and many smaller firms relied on Silvergate and Signature as their primary on-ramps to the traditional banking sector. Now, without those banking partners, crypto companies are scrambling for new ways to work with fiat currency and accept dollar deposits in return for services or in exchange for tokens.
Silvergate’s Silvergate Exchange Network (SEN) and Signature Bank’s Signet platforms were for years invaluable to the crypto industry, allowing 24/7, 365 real-time payments outside of traditional banking hours and without the use of more traditional and comparatively restricted payments services like the Federal Reserve’s Fedwire or ACH transfers.
Complicating matters, the FDIC (Federal Deposit Insurance Corporation) is allegedly signaling that any bidders attempting to scoop up Signature Bank from its receivership must agree to “give up all the crypto business,” per a report from Reuters.
Although hope springs eternal, as an FDIC spokesperson told Reuters after publication that the agency would not “require” divestment of crypto activities as part of any sale.
It remains unclear whether any future buyer would decide to reinstate Signature’s Signet platform.
Read More: The Silicon Valley Bank Story No One Has Told
It is difficult to overstate how critical both Signet and SEN were to the business structures of many top crypto firms.
Their closure also impacts traders of digital assets and the exchanges supporting them, as they no longer have the ability to exit their bets outside of regular banking hours — a knock-on effect observers believe may add an additional level of volatility to the already turbulent crypto markets.
Silvergate shuttered SEN on Friday, March 3, before announcing the voluntary liquidation of its business on Wednesday, March 8.
New York financial regulators took over Signature on Sunday, March 12, ending the viability of the Signet platform as an ongoing service.
Following the winding down of SVB, Silvergate and Signature, crypto company Circle, the issuer of the USDC stablecoin, processed $3.8 billion of redemptions, or investors swapping their stablecoin tokens back into dollars from Monday (March 13) to Wednesday (March 15) of this week.
USDC, which is intended to retain a stable, 1:1 peg to the U.S. dollar, broke that peg and fell to as low as $0.88 after Circle revealed that billions of the stablecoin’s reserves were held at the collapsed SVB, prompting investors to redeem their tokens out of broader market fears.
Circle CEO Jeremy Allaire announced on Sunday (March 12) that Circle would begin relying on settlements through BNY Mellon, limiting redemption requests to traditional banking hours and not the previous anytime-anywhere banking flexibility crypto assets once enjoyed.
“We have cleared substantially all of the backlog of minting and redemption requests for USDC,” Circle said in a statement.
The company has established a new relationship with crypto-friendly bank, Cross River, to bank its USDC token reserves and support the minting and redeeming process.
“Trust, safety and 1:1 redeemability of all USDC in circulation is of paramount importance to Circle, even in the face of bank contagion affecting crypto markets,” said Allaire.
Signature Bank board member Barney Frank, the former U.S. lawmaker with his name on the Dodd-Frank banking regulation, said during a March 12 interview that Signature Bank could have survived, but regulators “wanted to send a message to get people away from crypto.”
That crypto’s two main banks closed, one voluntarily and the other involuntarily, within the same week has stoked broader speculation that the government is “targeting” the digital asset industry.
“This coordinated behavior seems disturbingly reminiscent of Operation Choke Point, which as you know, was an Obama Administration initiative, where federal regulators applied pressure on financial institutions to cut off financial services to certain licensed, legally operating industries simply because certain regulators and policymakers disfavored those industries,” reads a letter sent to Federal Reserve Chairman Jerome Powell by a group of Republican senators, led by Bill Hagerty of Tennessee.
In a statement relayed by Reuters, the New York State Department of Financial Services (NYDFS), which placed Signature into FDIC receivership, said, “the decisions made over the weekend had nothing to do with crypto.”
Despite any untoward speculation, the failure of Signature Bank and the self-liquidation of Silvergate is more a reflection of concentrated fragilities in their operating models than any coordinated attack.
Still, one thing remains abundantly clear — the crypto industry, whether by accident or by design, is facing a banking crisis in the U.S.
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