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Signature Bank Seized – Is it the end of Crypto Supporting Banks?

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Recently, Signature bank, a reputed lender for many crypto firms, has been shut down by New York state regulators. This news has come immediately after the shutdown of leading financial institutions in the USA, Silvergate Capital Corp. and Silicon Valley Bank.

The most concerning part of this situation is that these institutions were counted as crypto-friendly financial institutions by the investor community. Therefore, their downfall is bound to affect the functioning of many crypto firms in the market.

In a statement released by Gov. Kathy Hochul of New York, he made a remark, “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,”

It is expected that the crypto market may not react favorably to this recent fall of crypto-friendly lenders, especially at the position when it started to show some signs of recovery after a lukewarm run in the market last year.

Fall of Signature Bank

Signature Bank, a New York-based financial institution, was founded by Scott Shay, Joseph DePaolo, and John Tamberlane in 1999 with support from Israel’s leading financial institution, Bank Hapoalim. As mentioned before, Signature Bank was kept out of its operations after the regulators found out that keeping the institution active could jeopardize the stability of the current financial system.

It is interesting to note that the bank had recently made efforts to attract cryptocurrency deposits, apart from dealing in the real estate lending business.

Signature Bank has also been a sufferer of the hysteria surrounding the closure of Silicon Valley Bank. The fall of these banks underlines the problems faced by small and midsize financial institutions that operate in specialized business lines and have a relatively small customer base. The failure of Silicon Valley Bank is largely attributed to poor financial decisions taken by the management, which eventually led to non-adherence to customer withdrawal requests. 

As soon as the news regarding the default of Silicon Valley Bank was out, customers of Signature Bank rushed in to find out whether their deposits were secure. As the target customer base of both banks was the same, this panic was bound to happen naturally. Two days before the closure, many of the depositors had already driven out huge chunks of money from their bank accounts. Soon, the regulators had to step in and announce the closure of Signature Bank.

According to some reports, around 90% of the bank deposits (approximately $88 billion) at the end of the previous year were not insured. In a statement issued by Signature Bank, the majority of its deposits are coming from accounting and law firms, the healthcare sector, real estate companies, etc. Its deposits from the digital assets sector come up to a value of $16.52 billion. In light of this crisis, the stock prices of many financial institutions have started falling in the market.

Immediate Reaction of the Crypto Market

Since Signature Bank was among the first financial institution that started accepting deposits of crypto assets in 2018, many experts believe that its fall has more to do with the recent crypto run than the panic that has been created after the collapse of Silicon Valley Bank. The fall of FTX and its consequent investigation brought down the prices of many cryptocurrencies last year. This cold run of the cryptocurrencies may have affected the operations of the bank, which eventually led to its closure. 

Though Signature Bank started to diversify its deposits lately, however, it still had a huge sum of money from crypto-related clients. It also operated a specialized payment platform called Signet, through which commercial crypto clients could execute real-time payments in dollars at any point in time without much restriction.

The importance of Signet also increased overnight when its competitor, SEN network, which was run by Silvergate, got shut to the surprise of many investors. 

Consequently, even Coinbase, the largest crypto exchange in the USA, is also linked with Signet to facilitate the quick transfer of funds by its clients. Thus, it was a go-to payment system for many customers whenever they were required to send money to vendors or exchanges. Customers may have a hard time easily entering and exiting exchanges when Signet shuts services, which will have a strong influence on the liquidity of the cryptocurrency market.

It is interesting to note that another crypto-friendly bank, Silvergate Bank, was a victim of collapse last week. Nonetheless, cryptocurrencies surprisingly recorded positive growth on their price charts after the failure of Signature Bank. Bitcoin, the leading digital asset in the market, demonstrated a rise of more than 5% in its value and rallied above $25,000. Similarly, Ethereum, too, witnessed a sizeable increase of 9% in its value by recording its price at around $1683. 

Bitcoin_price

Bitcoin Price via Coinbase.com

Experts are of the opinion that this sudden hike may not last long as the collapse of major financial institutions would definitely have some adverse impact on the prices of cryptocurrencies.

The collapse of Silvergate and Signature Bank has left crypto companies with few options through which they could allow fiat currency to make its way into crypto assets. There is no doubt that these two institutions have aided in the development of the crypto market with their specialized services and platforms, such as Silvergate Exchange Network and Signature’s Signet platform.

Conclusion

The bankruptcy of Signature bank is a huge setback for professional firms and the digital assets industry. Many tech startups have started their journey after receiving huge funding from this bank. The bank had a long history of providing specialized financial services to businesses operating in a niche area. Signature Bank has already made a good reputation among the crypto community by providing an efficient and fast payment system, Signet, to its customers.

Experts are of the fear that collapse of this big institution may bring back the dull cycle of cryptocurrencies. Realizing the gravity of this problem, regulators are already planning to take some steps to ameliorate the present situation. It is expected that some liquidity may be injected into the financial institutions to ensure that they are able to meet the withdrawal requests of their customers.

Though the crypto market hasn’t shown any adverse impact as of now, however, this doesn’t rule out the concern that this collapse would leave a dent in the smooth functioning of many crypto-oriented firms in the market. 

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