UPDATE: The FDIC has denied that it will require any Signature buyer to give up the bank’s crypto operations as a condition of sale.
Signature Bank was under federal investigation for suspected money laundering by its crypto clients before the New York financial institution was taken over by state and federal regulators.
On Tuesday, Bloomberg quoted sources saying U.S. Department of Justice (DoJ) investigators in both Manhattan and Washington, D.C.—as well as agents from the Securities and Exchange Commission (SEC)— were probing whether Signature “took sufficient steps to detect potential money laundering by clients—such as scrutinizing people opening accounts and monitoring transactions for signs of criminality.”
It’s unclear whether these investigations played any role in the decision to shutter the bank on March 12. The report stressed that neither Signature nor its recently sacked management have been accused of wrongdoing—at least, not yet—and Signature didn’t mention any such investigations in its most recent SEC filings.
SEC chairman Gary Gensler issued a brief statement on March 12 saying his group was focused on “identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”
Earlier this month, the Wall Street Journal reported that individuals connected with the Bitfinex exchange and the Tether stablecoin formerly used Signature accounts to process transactions. Signature closed the accounts a few years ago after concluding that the account owners were engaging in bank fraud.
Signature was one of America’s more crypto-friendly banks, along with its similarly collapsed West Coast rival Silvergate Bank. Both banks operated 24/7 settlement networks—Signature’s Signet and Silvergate’s SEN Network—that were popular with digital asset exchanges, market makers and crypto whales.
Signature began reducing its crypto exposure last year as the digital asset sector’s list of failed companies started to accelerate. In January, the bank was embarrassed by revelations that the regulatory-phobic Binance exchange was making use of Signet under the guise of a Seychelles-registered shell company.
Signature’s takeover came just days after similar measures were used to pull the California-based Silicon Valley Bank (SVB) out of the fire. Both banks had undergone a crisis of confidence that saw depositors withdrawing billions, forcing the banks to sell long-term investments at a loss. Silvergate was forced into liquidation a few days earlier as questions over its survivability became too loud to ignore.
Reuters reported that a group of Signature shareholders have already launched a class action suit accusing former CEO Joseph DePaolo, CFO Stephen Wyremski and COO Eric Howell of fraud. The suit is based on the bank having claimed to be “financially strong” mere days before its demise, claims the suit alleges were intended to mask the bank’s actual parlous state.
Dead or alive
Monday brought news that a new entity, Signature Bridge Bank N.A., had assumed temporary control of Signature’s still smoldering corpse and aimed to provide “a full suite of loan, deposit, and banking services.”
Late Wednesday, Reuters reported that the Federal Deposit Insurance Corporation (FDIC) is telling banks interested in bidding to acquire either Signature or SVB to get their bids in by Friday (17). The FDIC is reportedly keen on selling the banks in their entirety—preferably to an entity already holding an existing bank charter rather than to a private equity group—and will entertain selling them off piecemeal only if no all-in bids are forthcoming.
However, Reuters’ sources said a Signature buyer would need to agree to halt the bank’s crypto operations. It’s unclear whether this means the FDIC is open to a separate sale of the Signet platform, which despite early assumptions, doesn’t appear quite dead yet.
Signet appeared to be still functioning earlier this week, although it’s unclear who’s running it. Signet wasn’t mentioned in the release announcing Signature Bridge’s arrival and Signature’s dedicated Signet webpage offers no update on its current status.
Similar uncertainty surrounds Silvergate’s SEN, which a third party may or may not determine is worth reviving. Silvergate’s liquidation announcement said it was focused on preserving “the residual value of its assets, including its proprietary technology.”
But whatever benefit might be derived from operating such a platform—remember that the vast majority of crypto deposits at these banks were non-interest bearing—could be negated by the enhanced oversight that federal and state regulators will likely apply.
The New York State Department of Financial Services (DFS) claimed Signature was shut down “pursuant to Section 606 of New York Banking Law.” That section is extremely broad, allowing DFS to take possession of a bank if it determines that the bank “has violated any law,” is doing business in an “unauthorized or unsafe manner,” has “suspended payment of its obligations,” refused to “submit its records and affairs for inspection” by DFS, or a variety of other triggers.
However, Signature board member and former U.S. Congressman Barney Frank claimed that the bank had weathered the worst of the bank-run—including $10 billion in withdrawals last Friday alone—by Sunday, but federal authorities were intent on using Signature to send a message to other financial institutions. “This was just a way to tell people, ‘We don’t want you dealing with crypto.’”
Frank further claimed that Signature was the “unfortunate victim of the panic that really goes back to FTX,” the collapsed exchange formerly run by Sam Bankman-Fried (SBF). “The nervousness and beyond nervousness from SVB and crypto” led state and federal authorities to take “a more negative view of [Signature’s] solvency” than Frank claims was warranted.
“I think, if it hadn’t been for FTX and the extreme nervousness about crypto, that this wouldn’t have happened — even to SVB or to us. And that wasn’t something that could have been anticipated by regulators.”
Frank’s comments were rejected by DFS superintendent Adrienne Harris, who stated flatly that Signature’s shutdown was “not crypto-related.” Harris went on to state that “DFS has been facilitating well-regulated crypto activities for several years, and is a national model for regulating the space.”
A DFS spokesperson subsequently added that Signature “failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership. The decision to take possession of the bank and hand it over to the FDIC was only made when it was clear the bank would be unable to do business in a safe and sound manner on Monday.”
Reality has an anti-crypto bias
Critics of both Signature and Silvergate say the two banks could have avoided much of this controversy had they done actual due diligence on major crypto customers such as Binance and FTX. But crypto bros have pounced on Frank’s comments—and the FDIC’s ‘no-crypto’ Signature sale condition—as supporting conspiracy theories about a federal ‘choke point’ operation aimed at snuffing out crypto in the U.S. of A.
Never one to miss hopping on a good bandwagon, Wednesday saw Rep. Tom Emmer (R-MN) send a letter to FDIC chairman Martin Gruenberg, suggesting that “federal financial regulators have effectively weaponized their authorities over the last several months to purge legal digital asset entities and opportunities from the United States.”
Citing this January’s joint statement by the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency advising banks about the risks of associating with crypto firms, Emmer warned that any efforts to “weaponize recent instability in the banking sector … are deeply inappropriate and could lead to broader financial instability.”
Emmer demanded to know whether the FDIC has instructed banks not to provide crypto services, and if so, what analysis led to these instructions. Emmer also wants to know if the FDIC is warning banks that dealing with crypto will lead to more “onerous” supervision.
It’s worth remembering that in March 2022, Emmer co-signed a letter telling the SEC to back off its investigations into crypto firms, including FTX, which filed for bankruptcy eight months later. Emmer claimed at the time that the SEC’s requests for information from FTX were “overburdensome, don’t feel particularly… voluntary… and are stifling innovation.”
And in December 2021, Emmer publicly praised SBF at a congressional hearing, saying it sounded like “you’re doing a lot to make sure there is no fraud or other manipulation.” So maybe, just maybe, Emmer isn’t exactly the oracle of Delphi when it comes to judging peoples’ intentions.
Circle, issuer of the USDC stablecoin, was caught flat-footed by last week’s banking upheaval, leading to a dramatic ‘depegging’ of USDC’s stated ratio of 1:1 with the U.S. dollar. Circle has since ‘expanded’ its relationships with BNY Mellon and BlackRock to custody and manage the reserves backing USDC.
But Circle has also struck a new commercial banking partnership with New Jersey’s Cross River Bank to ensure automated minting and redemption of USDC can continue. Cross River offers a 24/7 crypto-to-fiat system called Real-Time Payments (courtesy of The Clearing House) and counts among its customers the Coinbase exchange, which is Circle’s USDC partner.
Trouble is, Cross River is heavily exposed to fintech groups, and a similarly tech-heavy client list helped bring down SVB. Cross River also counts some crypto-focused venture capital groups, including Andreessen Horowitz (a16z), among its investors. All of which could attract additional regulatory scrutiny, so Cross River’s attention to detail better be flawless.
Cross River is already under investigation by the U.S. Small Business Administration for its role in facilitating loans under the federal Paycheck Protection Program, a pandemic-related effort to prevent small-business layoffs. Cross River made around $1 billion in fees from administering PPP loans while recording a significantly higher-than-average rate of unforgiven loans.
U.S. giant JPMorgan’s commitment to crypto remains something of a question mark given the current regulatory climate but there are other U.S. financial institutions—Customers Bank, Mercury Bank, Axos Financial, BankProv, Western Alliance—that could help pick up the slack. Some of those smaller banks employ real-time settlement technology provided by Tassat Group, which also powered Signature’s Signet platform.
International options include the U.K.’s BCB Group or Singapore’s DBS and OCBC, but it’s anyone’s guess how quickly any of these banks would be able to absorb the kind of volume that Signet/SEN used to handle.
Meanwhile, the Federal Reserve chose Wednesday to announce that its own 24/7 real-time settlement network FedNow will commence operations in July. Program exec Ken Montgomery said FedNow “will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution.”
You know, maybe those conspiracy theorists are on to something…
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