The closing of the top two cryptocurrency banks within a matter of days could prove to be a giant setback in the future growth of digital assets. Silvergate and Signature Bank ran pioneering blockchain systems that allowed instant commercial transfers in and out of crypto around the clock. Silvergate Exchange Network (SEN), which debuted in 2017, was the first one, while Signature’s Signet was launched two years later. Since 2019 the networks provided by these two banks were responsible for moving more that $2 trillion to and from digital asset markets.
“You go back five years with the technology, that’s what it feels like right now,” laments Owen Lau, an analyst covering exchanges and asset managers for Oppenheimer.
Signature’s Signet network was based on technology from a small New York City-based blockchain technology company Tassat, which is now the only infrastructure player left in the space. Its technology is still being used by smaller providers including Customers Bank, Western Alliance, Byline, Cogent and Axos.
“This moment is a crucial juncture for the U.S. banking system, and policymakers need to decide what the system will look like when the dust settles,” Kevin Greene, CEO of Tassat, writes in an email to Forbes. “They can either allow rapid consolidation by the biggest banks, or support a more stable and robust ecosystem of small, mid-size, and regional banks to meet the needs of small business owners around the country.”
Before SEN launched in 2017, crypto companies relied on traditional payment rails like bank wires or ACH which are more costly, slower, only operate during banking hours and could leave industry players like exchanges open to settlement risks. Payments could take as long as 72 hours to clear.
“The way Signet got going, as well as Silvergate’s exchange network, is they created these systems to fill the gap of traditional batch-oriented processing by banks,” says Richard Crone, founder and CEO of payments consultancy Crone Consulting. “There was a mismatch with what was going on in crypto trading, which is 24 hours a day, seven days a week, instantaneous and that created a new business opportunity for Signet and for Silvergate.”
Exchanges like Coinbase used both SEN and Signet to help institutional clients fund and settle their accounts. The loss of these networks is a massive blow to crypto infrastructure which could decrease liquidity in the U.S. market. “If you want to add new money to the system you need that quick, instant network to facilitate that,” says Oppenheimer’s Lau.
If industry players are forced to go back to using the more costly ACH network it could increase trading costs in crypto markets. One alternative for moving assets between trading platforms would be converting to dollar-denominated stablecoins like Circle-issued USDC or Tether’s USDT. However over the weekend, USDC temporarily lost its peg to the dollar given $3.3 billion of its reserves were held at now-shuttered Silicon Valley Bank. The coin traded as low as 88 cents over the weekend, but recovered by Monday after the FDIC announced it would guarantee all deposits at Silicon Valley Bank and Signature Bank. Circle is now working with BNY Mellon and new partner Cross River Bank instead of Signet to process the creation and redemptions of USDC.
“With the closure of Signature bank announced tonight, we will not be able to process minting and redemption through Signet, we will be relying on settlements through BNY Mellon,” Circle CEO Jeremy Allaire stated in a tweet at the time of the FDIC’s announcement.
The first hurdle facing crypto companies that were holding deposits in Silicon Valley Bank, Signature or Silvergate will be to find new banking partners, which may prove difficult for smaller firms. If digital asset companies can’t find a U.S. banking partner, they’ll have to look abroad, which introduces issues with international money transfers when trying to serve U.S. consumers, Lau says.
“In the climate right now, large banks are unlikely to take on these risks if you’re a smaller crypto company,” says Lau. “The first challenge is finding a banking partner. The second will be connecting these systems together.”
Existing blockchain-based real-time payment networks require the sender and the receiver to hold deposit accounts with the same bank. In order to replace SEN and Signet, crypto market participants have to get a critical mass of companies to onboard at the same bank. Customers Bank, Western Alliance, Byline, Cogent and Axos are five banks with similar networks to Signet, all provided by Tassat. However, faith in the banking industry is rattled making insulated networks like bitcoin look more attractive. The KBW Nasdaq Bank Index was down 11.66% today compared to bitcoin which is up 9.28%.
Says Lau, “Bitcoin was born after the last financial crisis and this crisis may reinforce that narrative that when banks like Silicon Valley Bank are down, the Bitcoin system is still functioning quite well.”