Why was Signature Bank really shut down?

regulators in New York quickly took control of Signature Bank on Sunday night, making it the third bank to close in a week – and the third largest bank failure in US history.

The move to close the crypto-friendly bank, which lent money to firms in the digital asset space and facilitated crypto-to-fiat transactions via the Signet network, surprised many (including those who worked there.)

Why was it closed then? And is it part of a broader attack by regulators targeting crypto?

Barney Frank, ex-congressman behind the Dodd-Frank Act and board member of Signature Bank, said yesterday CNBC that regulators shut down the bank for sending “a very strong anti-crypto message.” But the New York Department of Financial Services today rejected Frank’s claim.

The regulator said the move had nothing to do with crypto Decrypt in an email that “the decisions made over the weekend were not crypto-related” and that the body “has facilitated well-regulated crypto activities for several years, and is a national model for regulating the space.”

But industry insiders who spoke to Decrypt say they’re not buying it, pointing to a growing trend that goes back months if not years.

“Pretty sure since the beginning of the year, the de-banking of the crypto industry has been happening,” Cailin Long, CEO and founder of crypto bank Custodia, told Decrypt. “I trust him [Barney Frank] said — he had no reason to lie.”

CEO of the Crypto Council for Innovation, Sheila Warren, told Decrypt that recent statements by regulators “appear to amount to de facto bans on dealing with all crypto companies, regardless of their business practices.”

Warren added that such a denial of bank access “would mark a seange for the approach to innovation and entrepreneurship in the United States, and signal that the United States chooses not to be competitive in the field of technology and prefers that unregulated parts of the economy and other countries lead.”

Signature Bank’s troubles had been brewing for a while: last month investment and algorithm trading firm Statistica Capital hit the bank with a class-action lawsuit alleging it facilitated failed digital asset exchange FTX’s activities. After crypto-friendly bank Silvergate announced its closure, Signature’s stock nose dive and Nasdaq later suspended trading in the bank’s shares.

The bank’s management was nevertheless surprised New York regulators’ decision to seize it, Bloomberg reported, does not cite named sources.

Regulators and lawmakers have been cracking down on the digital asset sphere recently – especially since collapse of mega digital asset exchange FTX in November.

Back in December, US lawmakers wrote a letter to central bank chief Jerome Powell demanding information on US banks’ ties to crypto. In it, Democratic senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota warned about mainstream banks’ ties to crypto — mentioning both Signature Bank and Silvergate, which voluntarily closed last week, by name.

Since then, banks with crypto ties have since faced difficulties, including Long’s Custodia, which was denied membership in the Federal Reserve System in January by the US Federal Reserve Board. Custodia is currently suing Fed over the denial.

“That’s right in line with the trend I’ve seen,” Long said. “Custodia was the first in what has clearly been a wave of efforts to push banks out of banking in the legal digital asset industry.”

Long is not the only one who thinks so. Venture capitalist Nic Carter claimed last month that the US government is using the banking sector to “orchestrate a sophisticated, widespread attack against the crypto industry” – which he called Operation Choke Point 2.0.

Politicians have also warned that the way the US government is acting is reminiscent of the controversial Obama-era initiative Operation Choke Point – which discouraged banks from doing business with a range of companies.

Just last week, four Republican lawmakers wrote a letter to heads of federal banking regulatory agencies asking why they were putting pressure on legitimate companies with digital assets.

After the crypto-friendly bank Silvergates March 8 turn offand then at Signature Bank days later, crypto companies are now once again locked out of the traditional financial system.

This is a big problem if crypto is to work in the mainstream: entities like crypto exchanges need access to traditional banks – like Signature – so their customers can buy assets like Bitcoin and cash out in US dollars.

Managing partner in A100x Ventures Nisa Amoils told Decrypt that the move on Sunday by New York state’s Department of Financial Services “came amid a broad regulatory crackdown on crypto from many federal and state regulators.”

FTX’s massive collapse prompted regulators to rush to figure out how to control the fast-moving and complicated digital asset space — in part because so many US clients lost money in the exchange’s bankruptcy.

Federal Reserve Chairman Jerome Powell so last week that financial institutions need to “take great care” in how they engage in the digital asset space.

He also added that he did not want to stifle innovation.

“There are still other banks for crypto like Mercury, Customers, etc,” Amolis said. However, their future lies in the hands of regulators, she added.