After the crypto-friendly Silvergate announced it would be voluntarily liquidating amid a capitalization crisis, blockchain companies rushed to one of the last U.S. banks that would offer financial services to the volatile industry—New York-based Signature Bank.
On Sunday, two days after the stunning failure of Silicon Valley Bank, the New York Department of Financial Services announced it had taken possession of Signature, which has deposits totaling $88.59 billion.
In a joint statement, the Treasury, Federal Reserve, and FDIC announced a systemic risk exception for Signature, guaranteeing that all depositors to the institution would be made whole, with no losses incurred by taxpayers.
"The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry," the statement read. "Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe."
A weekend of contagion
Friday's failure of Silicon Valley Bank, the first of an FDIC-insured institution since 2020, set off fears of contagion in the financial system. Like Silvergate, SVB had a concentrated deposit base, mostly serving the tech industry, whereas Silvergate catered to crypto firms.
Even though SVB didn't have many clients in the crypto space, its failure still had an immediate impact on the sector, with Circle—the issuer of the stablecoin USDC—holding $3.3 billion of the token's backing with the bank, representing 8% of its reserves. USDC wavered against its peg throughout the weekend, dropping below 90 cents at times on major exchanges.
Still, Signature—which had emerged as the new safe haven for crypto companies such as Coinbase—remained operational. Even as its stock plummeted, halting trading of its shares on Friday, banking experts told Fortune that Signature seemed to have more solid fundamentals thanks to its more diverse deposit base. Unlike Silvergate and SVB, Signature—as well as other banks that appeared to be teetering, such as First Republic—also served everyday customers.
Sunday's announcement from the NYDFS and the three federal banking regulators illustrates how quickly the situation devolved. The weekend saw many in the tech industry, as well as financial luminaries such as former Treasury Secretary Larry Summers, calling for depositors at SVB to be made whole to avoid further spreading panic.
Although Treasury Secretary Janet Yellen insisted that there would be no government bailout of SVB, regulators raced to find a solution, including initiating an auction for the failed bank, with bids due by Sunday afternoon.
The extraordinary statement on Sunday evening signaled that the agencies had found a way to protect depositors and stem the exodus of funds as confidence wavered in smaller banks—all without using taxpayer funds.
For crypto companies partnering with Signature, the announcement brings immediate relief that their deposits will be protected, but still leaves the open question of where they will be able to find banking services. Signature was not only one of the last banks to offer services to crypto companies, but also ran the popular real-time payments processor SigNet. Circle CEO Jeremy Allaire announced that it would be able to use the network for minting and redeeming USDC, instead relying on settlements through BNY Mellon.
Coinbase said it would continue to operate as usual and that client cash transactions would be facilitated with other banking partners. A Paxos spokesperson told Fortune that the crypto firm currently holds $250 million at Signature as well as private deposit insurance, adding that it was always looking to expand its network of banks.
For now, it is unclear what types of financial institutions will partner with crypto companies. Regulators have repeatedly warned of liquidity risks created by crypto clients to the banking sector in the wake of FTX's collapse, and the failure of Silvergate and Signature will likely keep other firms at arm's length. With Signature now in possession of NYDFS, the industry is running out of options.
