Silvergate And Signature’s demise could torpedo a key driver of crypto growth

The closure of the top two cryptocurrency banks in a matter of days could prove to be a major setback in the future growth of digital assets. Silvergate and Signature Bank operated 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, while Signatures Signet launched two years later. Since 2019, the networks provided by these two banks have been responsible for moving more than $2 trillion to and from digital asset markets.

“You go back five years with the technology, that’s how it feels right now,” laments Owen Lau, an analyst who covers stock markets 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. The technology is still used by smaller providers, including Customers Bank, Western Alliance, Byline, Cogent and Axos.

“This moment is a defining moment for the US banking system, and policymakers must decide what the system will look like when the dust settles,” Kevin Greene, CEO of Tassat, wrote in an email to Forbes. “They can either allow rapid consolidation of the largest banks, or support a more stable and robust ecosystem of small, medium and regional banks to meet the needs of small business owners around the country.”

Before SEN was launched in 2017, crypto companies relied on traditional payment rails such as wire transfers or ACH, which are more expensive, slower, only operate during banking hours and can leave industry players such as exchanges open to settlement risk. Payments may take up to 72 hours to clear.

“The way Signet got started, as well as Silvergate’s exchange network, is that 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. “It was a mismatch with what was going on in crypto trading, which is 24/7, instantaneous, and it created a new business opportunity for Signet and for Silvergate.”

Exchanges such as 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 the crypto infrastructure that could reduce liquidity in the US market. “If you want to add new money to the system, you need the fast, immediate network to facilitate it,” says Oppenheimer’s Lau.

If industry players are forced to revert to using the more expensive ACH network, it could increase trading costs in crypto markets. An alternative to moving assets between trading platforms would be to convert to dollar-denominated stablecoins such as Circle-issued USDCUSDC
or Tethers USDTUSDT
. But over the weekend, the USDC temporarily lost its peg to the dollar, as $3.3 billion of its reserves were held at the now-closed Silicon Valley Bank. The coin traded as low as 88 cents over the weekend, but recovered on 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 handle the creation and redemption of USDC.

“With the closure of Signature Bank announced tonight, we will not be able to process minting and redemption through Signet, we will rely on settlement through BNY Mellon,” Circle CEO Jeremy Allaire said in a chirping at the time of the FDIC’s announcement.

The first hurdle for crypto companies that held deposits in Silicon Valley Bank, Signature or Silvergate will be finding new banking partners, which could prove difficult for smaller firms. If digital asset companies can’t find a U.S. banking partner, they have to look overseas, which introduces issues with international money transfers when trying to serve U.S. consumers, Lau says.

“In the climate right now, big banks are unlikely to take on this risk if you’re a smaller crypto company,” Lau says. “The first challenge is to find a banking partner. The other will be to connect these systems together.”

Existing blockchain-based real-time payment networks require the sender and recipient to have deposit accounts in the same bank. To replace SEN and Signet, crypto market players need to get a critical mass of companies on board the same bank. Customers Bank, Western Alliance, Byline, Cogent and Axos are five banks with similar networks to Signet, all supplied by Tassat. However, faith in the banking industry is collapsing, making isolated 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, “BitcoinBTC
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 still works pretty well.”