Bank collapses leave billions in crypto deposits homeless with few spots to land

Billions in cryptocurrency deposits are searching for a new home after the collapses of Silvergate Capital Corp. and Signature Bank.

The self-liquidation of Silvergate Bank, which had $3.83 billion in digital-asset-related deposits at Dec. 31, 2022, and the failure of Signature Bank, which had $17.79 billion in crypto-related deposits at the same date, has left many of those crypto customers bank-less as they struggle to find new institutions given renewed regulatory scrutiny of the industry following recent events.

Regulators were already cautioning financial institutions on the threat of crypto to the safety and soundness of the banking system prior to the recent failures, and that stance only hardened in recent weeks. Now banks are more hesitant to increase their exposure to the space, leaving crypto companies high and dry.

"The regulatory view has gone from dim to dark," Troutman Pepper financial services lawyer James Stevens said in an interview.

This article is the first in a series of stories examining the future of banks engaging with cryptocurrency after a tumultuous ride for digital assets, including the recent crypto winter and collapse of two banks heavily involved in the space.

Renewed reluctance

Following a run after the failure of Silicon Valley Bank, just $4 billion in crypto deposits were left at Signature Bank. New York Community Bancorp Inc. passed on those deposits as part of its acquisition of Signature Bridge Bank NA.

"It is notable when Signature's assets were sold, the crypto deposits were left [behind]," Morningstar analyst Michael Miller said in an interview.

The FDIC instructed those depositors to close their accounts and move their money by April 5, according to a report from Reuters, potentially a signal that there were no interested buyers, industry experts said.

"I do believe that there was not an appetite in the market generally to acquire those deposits because of the scrutiny that that industry has received from a regulatory standpoint recently," Troutman Pepper's Stevens said in an interview.

Banks' potential reluctance to buy those deposits is a distillation of the problem crypto depositors at recently failed banks face as they try to find a new home, with many banks reluctant to increase their involvement with or enter the cryptocurrency industry.

The renewed reluctance to engage with digital assets comes after many banks previously involved in crypto began pulling away from the space in the back half of 2022, spurred by the crypto winter and regulators' distaste for the asset class.

Between the third and fourth quarters of 2022, Silvergate reduced its digital asset-related deposits to about 61% of total deposits from nearly 90%, according to S&P Global Market Intelligence data.

Additionally, Metropolitan Bank Holding Corp. and Provident Bancorp Inc. reduced their digital asset-related deposits to less than 10% of total deposits. Signature Bank and Customers Bancorp Inc. saw increases, however, which could be due to the nature of the blockchain-based payments systems they run. Customers Bancorp offers a service similar to Signature's Signet, where users can transact in Customers Bank Instant Token by maintaining US dollars in deposit accounts at Customers Bank.

Who will take them in?

Given recent events, banks that have not already engaged in crypto banking are unlikely to start now, making banks that already had exposure to that industry the most likely landing spot for crypto firms looking for a new banking relationship.

"It will just be the existing legacy banks that are serving that industry," Stevens said. "We just don't see a lot of banks trying to get into that industry that aren't already in it."

The fallout of Silvergate and Signature will provide an opportunity for banks already serving the crypto industry — but without outsized concentration in that industry — to win business, Stevens said. But those banks will be hesitant to expose themselves to any further crypto deposit concentration and will likely be selective about who they work with.

"I think that those banks will continue to try to serve those customers, but they're going to be very picky about which customers they onboard," Stevens said.

Larger, well-established crypto companies will find it easier to establish new banking relationships, multiple experts said.

"It may be challenging, especially for smaller players, less-established players in the space or those that are looking to grow businesses in the space to have access to banking services," said Joe Castelluccio, co-leader of Mayer Brown's fintech and digital assets, blockchain and cryptocurrency groups.

Galaxy Digital Holdings Ltd. is one example of a well-established crypto company that was able to quickly move the deposits it had at Silvergate and Signature to different banks.

"They're well-known to the regulators by virtue of being one of the only public diversified crypto businesses," Rosenblatt analyst Andrew Bond said in an interview. "Many of its competitors are not, and they will likely not be able to find big partners, whereas Galaxy, given its regulatory compliance being a public company [and] having good relationships with a number of banks, is in a different situation."

Galaxy's previously established banking partnerships prior to the recent fallout "allowed us to be nimble, and quickly and successfully migrate cash balances," according to the company's fourth-quarter 2022 earnings press release. The majority of the company's deposits are at a large, US-based bank, President and Chief Investment Officer Christopher Ferraro said on the company's March 28 earnings call, though he did not provide a name.

In addition to more well-established firms having an easier time securing new banking partnerships, crypto companies seeking operating accounts to do things such as pay their payroll and rent will find it easier to find a new bank, as opposed to deposits associated with customer funds from exchanges providing custody of crypto assets, Stevens said.

Success story

Despite the ongoing challenges, some crypto companies are already beginning to find new homes.

Coinbase Global Inc. partner Circle Internet Financial Inc., which held $3.3 billion in reserves for its stablecoin, USDC, at Silicon Valley Bank, announced in March that Fort Lee, N.J.-based Cross River Bank would be its new banking partner for producing and redeeming the stablecoin. Circle also has a banking relationship with The Bank of New York Mellon Corp.

Circle's partnership with Cross River is an indication that other small banks might be interested in developing crypto-banking relationships, and that banking access hasn't been completely cut off for crypto firms, Miller said.

"Their access to banking hasn't been cut off, but in general for cryptocurrency firms … it's going to be a little harder," Miller said. "It's a concentrated, volatile space that creates risk for the banking partners."