As the crypto sector continues to mature, its relationship with the traditional banking sector has come increasingly under the spotlight. In recent weeks, three major U.S. banks serving the crypto sector have abruptly closed their doors for various reasons, leaving many in the industry wondering what exactly was behind their closures. Signature Bank, Silicon Valley Bank and Silvergate Bank have all been at the vanguard of the crypto revolution, offering banking services to U.S. crypto firms as well as offering custodial solutions and loans to institutional investors.
Just days ago, the Federal Deposit Insurance Corporation (FDIC) closed Signature Bank and sold off its assets and deposits — with the exception of roughly $4 billion in crypto deposits — to New York Community Bancorp’s Flagstar Bank. Silvergate and Silicon Valley Banks had previously shut down their crypto operations following a spate of withdrawals from their customers.
This week, I traveled to Washington, D.C, for the DC Blockchain Summit and the CFTC Technology Advisory Committee meeting, where I sought to uncover what drove these three banks to shutter their crypto operations.
Contrary to the FDIC’s claim that the closures were for the protection of the U.S. economy and the public’s confidence in banking, the reality seems to be something more complex.
At the blog site State of Crypto, I followed the events and tried to make sense of the action surrounding the closures. My colleague Helene Braun reported that the Federal Home Loan Bank of San Francisco denied it forced Silvergate to repay its loans – but neither would they say whether they refused to roll its advance to Silvergate.
Meanwhile, Jesse Hamilton reported that a number of major banks have outright said they are not looking to provide services for the crypto industry, or at least not for companies that engage directly with tokens.
On Sunday, the FDIC approved Flagstar Bank’s acquisition of Signature Bank’s assets, though there were reports that the government corporation refused to allow bidders to purchase cryptocurrency parts of Signature’s business.
Data shows that Signature Bank had $89 billion in deposits on March 8, with approximately $16.5 billion coming from the crypto industry. By March 19, that figure had drastically plunged to $4 billion – an estimate supported by former Congressman Barney Frank who said $10 billion had left the bank on March 9.
What emerges from these reports is that the closings weren’t entirely unexpected. It appears that there was an invisible run on the banks prior to their closure – customers had withdrawn their funds, making the banks unsustainable.
If other depositors followed suit of the crypto customers, it could explain the drastic drop in deposits. Moreover, if big banks told crypto customers they were not willing to provide services to crypto companies, it might have been the straw that broke the banks’ back.
It’s important to remember that crypto-friendly banks Silvergate and Silicon Valley Bank had also been forced to close their crypto arms only weeks prior. The closings of these banks offer a worrying precedent for other banks in the crypto sector, who could face similar scrutiny from regulators in the near future.
A hearing has been scheduled for March 29 in the U.S. House Financial Services Committee to explore the factors behind the closings of Signature Bank and Silicon Valley Bank. FDIC chair Martin Gruenberg and Fed Vice Chair for Supervision Michael Barr are expected to testify and hopefully shed light on their motivations for their decisions.
In addition, the Blockchain Association has sent out Freedom of Information Act requests to the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency in hopes of getting more clarity on the potential de-banking of crypto firms.
All of these developments represent a major shift in the relationship between traditional financial institutions and the crypto sector, and it is important that the industry is aware of its financial implications.
The crypto sector needs banks for deposits, loans and other banking services, yet banks have become increasingly hesitant to offer their financial products to the crypto sector. While crypto enthusiasts remain hopeful that these problems can be resolved, it is increasingly clear that the banking model is not necessarily the answer the industry is looking for.
Firms need to know that their funds and transactions are safe, and for that to happen banks need to be comfortable serving crypto companies. As such, both regulators and industry observers need to work together to understand the factors that drove these closures and find solutions that will prevent similar issues from reoccurring in the future.