Why Was Signature Bank Really Shut Down?

New York regulators quickly took control of Signature Bank Sunday night, making it the third bank to close its doors in a week—and the third largest bank failure in U.S. history.

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

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

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

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

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

“Certainly 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 what he [Barney Frank] said—he had no reason to lie.”

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

Warren added that such a denial of banking access "would mark a seachange for the approach to innovation and entrepreneurship in the US, signaling that the US is choosing not to be competitive in the tech space and would prefer that unregulated parts of the economy and other countries lead."

Signature Bank’s troubles had been brewing for a while: last month investment and algorithmic 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 nosedived and the Nasdaq later halted trading of the bank's shares.

Nevertheless, the bank's management was surprised by the New York regulators’ decision to seize it, Bloomberg reported, citing unnamed sources.

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

Back in December, U.S. lawmakers wrote a letter to Federal Reserve Chairman Jerome Powell demanding information on American banks’ ties to crypto. In it, Democrat senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota warned of mainstream banks’ ties to crypto—mentioning both Signature Bank and Silvergate, which voluntarily shutdown last week, by name.

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

Dear God. Barney Frank openly admits that Signature was arbitrarily shuttered despite no insolvency because regulators wanted to kill off the last major pro-crypto bank. Colossal scandalhttps://t.co/Sa25w6Au7bpic.twitter.com/gLuiybHepS
— nic carter 🌠 (@nic__carter) March 13, 2023

“It is absolutely in keeping with the trend I’ve seen,” Long said. “Custodia was the first in what clearly has been a wave of efforts to shove banks out of banking the lawful digital asset industry.”

Long isn’t the only one who thinks that. Venture capitalist Nic Carter claimed last month that the U.S. government is using the banking sector to “to organize a sophisticated, widespread crackdown against the crypto industry”—which he dubbed Operation Choke Point 2.0.

Politicians have also warned that the way U.S. authorities are acting is reminiscent of the controversial Obama-era initiative Operation Choke Point—which discouraged banks from doing business with a number of companies.

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

Following crypto-friendly bank Silvergate’s March 8 shutdown, and then on Signature Bank’s days later, crypto companies are now once again locked out of the traditional finance system.

This is a big problem if crypto is to operate 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 to U.S. dollars.

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

FTX’s massive collapse urged regulators rushing to figure out how to control the fast-moving and complicated digital asset space—in part, because so many U.S. customers lost money in the exchange’s bankruptcy.

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

He also added that he didn’t want to stifle innovation.

“There are still other banks for crypto like Mercury, Customers, etc,” said Amolis. Their futures, however, lie in the hands of regulators, she added.