Amid the Failures, Who Is Providing Banking Services to Crypto?

The banking industry is facing instability, and in the US, problems became clearly visible when three crypto-friendly banks ran into trouble earlier this month. These entities are the now well-known Silvergate Bank, Silicon Valley Bank, and Signature Bank.

Signature has since been taken over by Flagstar Bank, and this week, news came in that Silicon Valley Bank had been purchased by First Citizens Bank, with the new owners stating there was a structure “to purchase all of the assets and liabilities,” as part of “a whole bank purchase.”

These continuing events have caused a flurry of speculative claims and counter-claims. Some advocates for the crypto industry assert that a clandestine operation is in process, dubbed Operation Choke Point 2.0, to shut down crypto in the US by cutting off links with conventional banking services.

Others have replied that such claims lack substance and that the banks in question were riddled with problems of their own making, some of which were related to crypto (and notorious entities such as FTX) and some of which were more standard financial problems, but none of which are evidence of conspiracy.

Whichever side of the debate is closer to the truth, the most immediate practical questions are around how crypto companies in the US can now access banking services and what happens next.

Silvergate: the First Domino

When Silvergate Bank went out of operation, it was the first domino to fall, and several large crypto entities, including Paxos, BitStamp, and Coinbase, abruptly shifted their business elsewhere.

Coinbase currently lists the following as institutions it uses for depositing customer funds:

• Signature Bank
• JP Morgan Chase
• Cross River Bank
• Pathward

Note that after Signature Bank went into receivership, and Flagstar Bank then bought its deposits and loan portfolios, that deal did not include digital assets.

A key technical issue for crypto entities following the closure of Silvergate was their sudden inability to utilize the Silvergate Exchange Network (SEN), which was a private network that could facilitate fiat/crypto exchanges around the clock, an operation critical to working with crypto.

The first solution was to move over to Signature Bank, which had its similar system called Signet, but it wasn’t long until it was the turn of Signature Bank to hit critical problems, ending up in FDIC receivership.

As mentioned, a notable characteristic of the Flagstar purchase of Signature is that Signature’s digital operations, including Signet, were not acquired, staying, instead, under the control of the FDIC. Central crypto platform Coinbase then announced that it would no longer support Signet (which was reported as being still operational).

It’s known that the technology provider Tassat, which developed the Signet system, also provided similar products to regional banks in the US, including Customers Bank, Western Alliance, Byline, and Cogent, and when it comes to this kind of tech, there’s also Cross River Bank, which provides a real-time payments system incorporating a fiat on/off ramp.

USDC stablecoin issuer Circle was also forced to stop using Silvergate, and a glance at its reserves information indicates that it has US Treasuries and cash held at The Bank of New York Mellon. Circle’s CEO, Jeremy Allaire, stated, when Silvergate ceased operations, that the Bank of New York Mellon was being used for settlements before the next day announcing that Cross River Bank would take over to provide automated settlements.

It is apparent, then, that banking services, including all-hours networks facilitating fiat/crypto exchanges, are currently available. However, there have also been reports of concerns about the crypto industry’s risk profile and of banks being cautious about being openly crypto-friendly due to concerns about the possible actions and intent of, at times, unpredictable regulatory bodies.

Investors Not Scared

Strikingly, it appears that the potential for a greater banking crisis, coupled with what some are describing as regulatory hostility towards crypto, is not scaring away investors. In fact, the opposite may be true.

Steven Lubka, the Head of Private Clients and Family Offices at Swan Bitcoin, a financial services company that assists clients in acquiring and holding Bitcoin, explained that while these current banking crises have been unfolding, his company has seen “ and CEOs allocating 1-5% of the corporate treasury in case of emergency.”

I run the Private Wealth team for a #Bitcoin company ?

I can absolutely 100% guarantee you that we are seeing new clients come in who are buying #Bitcoin specifically to hedge against banking failures

This is simply a real thing which is occurring https://t.co/eNi8cLLK6R

— Steven Lubka (@DzambhalaHODL) March 22, 2023

It should also be noted that within crypto, along with pushback against perceived overreach by regulators, there has also been a pivot towards creating new financial rails that bypass traditional banks altogether.

Chief Economist at Circle, Gordon Liao, has recently argued the case for decoupling payments and banking, and Coinbase’s CEO, Brian Armstrong, has publicly speculated on the idea of Coinbase becoming a neo bank, operating outside existing conventions.

What can currently be said for sure is that though the situation around crypto companies, banking services, and even the possibility of crypto-oriented neobanks remains volatile and unresolved, the crypto industry itself remains as active as ever and navigates new routes when required.

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