Signature, Silvergate collapse may create crypto liquidity issues as banks shy away from purchases

The closure of New York based Signature bank, which has a number of crypto clients, is likely to reverberate across the digital asset industry, days after California’s Silicon Valley Bank collapsed in the second-largest bank failure in U.S. history, and Silvergate Bank, another crypto-friendly bank, said it would wind down.

For years, relationships with banks have remained tricky for crypto companies. Banks have been traditionally reluctant to work with digital asset entities, in part due to a lack of regulation in the sector, industry participants said.

Silvergate Bank SI and Signature Bank SBNY were both, at least at one point, seen as among the most crypto-friendly banks in the U.S., though Signature had been cutting its crypto-related deposits after the collapse of exchange FTX in November.

The collapse of Signature and Silvergate may make it more difficult for institutions to purchase cryptocurrencies with fiat currencies, according to Gracy Chen, managing director of crypto derivatives exchange Bitget.

The bank failures are also likely to impact market makers’ ability to move capital between trading venues, thus restricting liquidity across crypto trading platforms, especially during non-US banking hours, said David Wells, chief executive at Enclave Markets, a crypto exchange.

Both Signature and Silvergate provided real-time payment networks, named Signet and SEN, respectively, which allowed their clients to send money in U.S. dollars 24/7 to each other.

“I don’t expect a rush from any banking partners to launch a 24/7 funds movement solution like SEN and Signet as that was likely a reason Silvergate and Signature were heavily scrutinized,” said Wells in an email.

Crypto exchange OKcoin on Monday said it has temporarily paused U.S. dollar deposits by wire, along with ACH, a type of electronic bank-to-bank payment, and over-the-counter services.

“Signature is our primary USD bank for customer transactions,” Hong Fang, chief executive at the exchange, wrote on Twitter Monday. “Our team is working very hard on alternative channels and solutions in real time.”

The main on-and-off ramps to fiat currencies from crypto are essentially gone now, after the closure of Silvergate and Signature, said Stefan Rust, chief executive at Truflation.

Crypto companies will be forced to move across into “systemically important banks” such as JP Morgan, Barclays and Nomura, Rust said in emailed comments. “However, with regulators like the US SEC making life ever harder for cryptocurrency firms, this may not be simple or even possible for many,” said Rust.

In January, federal regulators issued a statement, warning banks to beware of ‘significant’ risks surrounding crypto assets.

Denelle Dixon, chief executive at Stellar Development Foundation, said she is still a “believer in the fact that banks are available to the crypto industry.”

Banks want to work with companies who have thought about their governance and who are well-run businesses, Dixon said in a call. “It’s not any different from crypto to other industries,” according to Dixon.

Despite concerns about digital asset companies’ relationship with banks, major cryptocurrencies rallied Tuesday. Bitcoin surged 18% to above $26,000, according to CoinDesk data. The largest cryptocurrency is still down over 60% from its all-time high.

Original Source: https://www.marketwatch.com/story/collapse-of-signature-silvergate-may-create-crypto- liquidity-issues-as-banks-shy-away-from-purchases-e7a4aac0