Crypto Banking Contagion: Silvergate, Signature, and SVB Failures Shake the Industry

Hold on to your hats, crypto enthusiasts! The past week has been a whirlwind, and if you blinked, you might have missed a seismic shift in the crypto landscape. Three banks bit the dust in just days, and guess what? Three of them were deeply intertwined with the crypto world. Silvergate and Signature Bank were known havens for crypto clients, while SVB’s collapse sent shockwaves as the 20th largest bank in the US. The FDIC stepped in after SVB’s dramatic failure on March 10, 2023 – a whirlwind of events from Thursday to Monday. If you weren’t glued to Crypto Twitter, consider yourself lucky, but it’s time to catch up because this is big.

Calm After the Storm? Not Really.

Markets might have taken a breather on Monday, but make no mistake, the tremors are still being felt. The relationship between the crypto industry and TradFi (traditional finance) is shrouded in uncertainty. Danny Talwar, Head of Tax at Koinly, is sounding the alarm. He warns that this wave of ‘de-banking’ – financial institutions cutting ties with crypto firms – could have serious and lasting consequences. Where will crypto businesses and exchanges turn for financial services now? Could this de-banking trend stifle innovation in the blockchain space?

Talwar elaborates, “The setbacks following the failure and shutdown of crypto-friendly banks like Silvergate, SVB, and Signature Bank could potentially set the crypto sector back a decade. Combined with the crypto-native collapses we saw last year, this creates a challenging environment for innovation in the US.”

Impact Across the Crypto Spectrum

Brian Fu, co-Founder and co-Project Head at zkLend, highlights that the fallout isn’t uniform. It depends on the size of your crypto operation. Let’s break down the potential impact:

• Larger Exchanges: Expect delays in settlement times and challenges with on-ramping and off-ramping fiat currencies.
• Smaller Crypto Businesses: Opening a basic bank account for day-to-day operations might become an uphill battle, or even impossible.

We’re already seeing ripples. Binance, a major exchange, announced a temporary halt on British Pound (GBP) on/off ramps for new UK customers starting March 13th, and this will extend to all users by May 22nd. Paysafe, Binance’s GBP banking partner, hasn’t offered a clear explanation. Is this connected to the US banking turmoil? It’s a question mark hanging in the air.

Signature Bank’s Crypto Pivot: Too Little, Too Late?

Remember the FTX implosion back in November? Signature Bank tried to distance itself, assuring customers that their exposure to the disgraced exchange was minimal. They even sold off a significant chunk – $8-10 billion – in digital assets, aiming to shed their image as just a ‘crypto bank.’ This sell-off brought their digital asset holdings down to just 15% of their total assets.

“We’re not just a crypto bank, and we want that to come across loud and clear,” Eric Howell, Signature Bank’s COO, stated in December. But despite these efforts, Signature Bank faced the same fate as Silvergate and SVB.

The US: A Hostile Environment for Crypto?

Fu sums it up starkly: “The recent shutdowns of SVB, Silvergate, and Signature – three of the most crypto-friendly banks in the US – have undeniably made the US a tougher place for crypto VCs, exchanges, and startups to operate.”

While depositors are expected to be made whole, a crucial piece of the crypto infrastructure is vanishing: real-time payment platforms. The Silvergate Exchange Network (SEN) and Signature’s Signet were cornerstones of crypto banking.

Signet Still Kicking? But for How Long?

Interestingly, reports on Tuesday suggested that Signature Bank’s Signet service was still operational. However, the industry isn’t waiting around. The scramble for alternative solutions is on. Why are SEN and Signet so vital? These networks were specifically designed for crypto businesses, offering:

• Real-time Payments: Transactions settle instantly, 24/7.
• Zero Transaction Costs: Commercial clients could move USD without fees within the network.

Signet, launched in 2017, followed SEN which debuted two years earlier. Since 2019, these networks have facilitated over $2 trillion in transfers between digital asset exchanges. Their potential disappearance represents a significant short-term blow. Without crypto-specific payment rails, the industry faces:

• Increased Trading Costs: Reliance on slower and more expensive ACH networks.
• Operational Bottlenecks: Delays in transactions and settlements.

The Hunt for New Banking Partners

Crypto companies, particularly exchanges, heavily relied on Signet and SEN. Now, crypto founders are in a frantic search for new financial lifelines. Twitter is buzzing with speculation about where the industry will turn. DCG, the parent company of CoinDesk, is reportedly seeking new banking partners for its portfolio companies. A memo seen by CoinDesk identified several banks as potentially crypto-friendly, including Santander, HSBC, Deutsche Bank, BankProv, Bridge Bank, Mercury, Multis, and Series Financial.

However, the memo also hinted at limitations. Crypto businesses might face restricted services – perhaps brokerage, money market access, or wire transfers, but not full-fledged banking. Traditional banks might cautiously open accounts, but deep crypto integration could be off the table. And the fallout isn’t contained to crypto-friendly banks. The crisis is spreading fear across the broader financial sector. The fear of contagion is real, with funds flowing towards larger, perceived-as-safer institutions.

Fu explains, “Global contagion worries and a loss of confidence in the resilience of regional banks with bond portfolios similar to SVB are impacting banking stocks across the board.”

Silver Linings? Ethereum Staking as a Safe Haven

The immediate future remains uncertain. But long-term investment strategies are undoubtedly shifting. Steven Quinn, Head of Research at P2P.org, suggests a potential silver lining. “Ethereum staking is ideally positioned to benefit as a risk-on asset that provides real yield.” In times of turmoil, assets that generate actual returns might become increasingly attractive.

Key Takeaways: Navigating the Crypto Banking Storm

Here’s a quick recap of what’s happening and what it means for the crypto world:

• Crypto Banking Under Pressure: The failure of Silvergate, Signature, and SVB signals a major contraction in crypto-friendly banking services.
• Debanking Concerns: Crypto businesses face potential difficulties in accessing traditional financial services, hindering operations and innovation.
• Payment Network Disruption: The loss of SEN and Signet could lead to slower, more expensive transactions and operational challenges.
• Search for Alternatives: The industry is actively seeking new banking partners and exploring alternative financial solutions.
• Contagion Risk: The crisis extends beyond crypto, impacting regional banks and sparking broader financial market concerns.
• Ethereum Staking Opportunity: Amidst the uncertainty, assets like Ethereum staking, offering real yield, might gain prominence.

The crypto banking landscape is in flux. While the immediate impact is disruptive, it also forces the industry to adapt, innovate, and potentially build more resilient and decentralized financial infrastructure. The coming weeks and months will be critical in shaping the future of crypto finance.