Silvergate, Signature Collapse Leaves Crypto with Few Bank Partners

Crypto’s go-to banks collapsed last week, and it left U.S.-based players in the embattled industry with few remaining links to the traditional financial system.

Silvergate Bank served more than 1,000 crypto businesses and held more than $11B in customer deposits as of Sept. 30. On Wednesday, it announced its closure “in light of recent industry and regulatory developments.” While Silvergate had become the most crypto-friendly bank, Signature and Silicon Valley Bank, which were also known to work with tech and crypto companies, also failed in the past week.

It’s the latest blow to an industry under siege in the United States, where bank regulators have issued repeated warnings regarding crypto’s risk profile. There are few remaining banks willing to work with crypto companies, according to experts, and there are significant obstacles to those willing to fill the void left by Silvergate. At stake is the ability for companies in the crypto industry to accept and make payments in U.S. dollars, and convert crypto to fiat and vice versa, drastically limiting their business in the U.S.

“There is so much regulatory scrutiny that I think most of the banks that offer this sort of banking-as-a-service for the crypto industry are pulling back significantly,” Julie Hill, a professor at the University of Alabama School of Law, told The Defiant. “So I’m not sure that there will be a lot of alternatives to Silvergate.”

According to Hill and a list of banks that service Circle, the company that issues the USDC stablecoin, banks known to work with crypto companies include Bank of America, BMO Harris Bank, Customers Bank, Deltec Bank & Trust, JPMorgan Chase, Signature Bank, Silicon Valley Bank, Wells Fargo, Bank of New York Mellon, Citizens Trust Bank, New York Community Bank and State Street.

But those options are dwindling as well. Facing its own run on deposits, Silicon Valley Bank failed on Friday. It was the second-largest bank failure in U.S. history, according to the Wall Street Journal. Regulators then seized Signature Bank on Sunday.

Signature Bank, the second-most prominent in crypto, had previously announced its intention to wean itself from the industry. On Friday, it suffered a run on its deposits, due to customer concern over its exposure to crypto, board member and former Congressman Barney Frank told the Journal. Meanwhile, crypto exchange Gemini denied a report that JPMorgan had ended their relationship, and Crypto.com has lost its ability to accept deposits in US Dollars.

Silvergate wasn’t just a bank for crypto companies, JPMorgan noted in a report to investors. Members of the bank’s Silvergate Exchange Network (SEN), were able to move fiat currency between accounts instantaneously.

“Replacing this instantaneous network for processing dollar deposits and withdrawals among crypto market participants 24/7 would be difficult in the current backdrop,” according to the report, which cited regulatory pressure and the “general unwillingness of traditional banks to engage with crypto companies following the FTX collapse.”

Likely destinations for former Silvergate customers include Signature Bank, Provident Bancorp Inc, Metropolitan Commercial Bank, and Customers Bancorp Inc., according to the report, which was authored before Signature’s collapse.

Smaller banks that would like to fill the void might struggle to do so as they may face practical and regulatory challenges, according to Hill.

“Regulators, seeing the fallout from Silvergate, are going to be especially skeptical of smaller banks that want to get into this space, perhaps without adequate liquidity,” she said. “It’s not just the technology — the anti-money laundering and compliance burden, this is large and doesn’t scale up immediately, either.”

The solution may lie offshore. Some companies abroad have already said they’re happy to service castaway crypto businesses.

BCB Group is one such company, according to JPMorgan. The payments services company, which links crypto companies to a consortium of banks and has a license from the UK regulator, has indicated that it will add US dollars to its existing fiat to crypto on-ramps for currencies such as sterling, euros, yen and Swiss francs.

Crypto advocates have repeatedly warned the U.S. risks offshoring a nascent, cutting-edge industry. The crypto-friendly bank failures of the past few days are another push in this direction.