How Is Signature Bank Enjoying The Advantage When Silvergate’s Rival Collapses?

Key Points:

• Signature’s Signet is gaining ground after the collapse of Silvergate’s SEN system.
• The FTX storm has passed, but it still leaves a huge void for crypto companies. Signature has taken a good defense when it comes to reducing exposure to digital assets.
• Cash flow is still a problem for Signature.

At a time when Silvergate was in crisis and stopped operating suddenly after a series of clearly indicated financial risks, Signature Bank, another crypto-friendly bank, has rapidly solidified its position with revised financial numbers as of March 8, 2023, reiterating its robust, well-diversified financial position and low digital-asset-linked deposit balances in response to industry trends.

This is certainly an act of taking advantage of its monopoly when right now, Signature Bank is the bank that benefits the most when Silvergate has gradually sunk on its ship.

Silvergate and SEN vs. Signature and Signet

The “Silvergate Exchange Network,” or SEN for short, a program at Silvergate Bank, played a critical behind-the-scenes role in allowing off-blockchain money transfers between large investors and crypto exchanges.

The network is now defunct, having been shut down last week after the bank’s parent firm, Silvergate Capital Corp., said there were concerns about the bank’s capacity to continue as a going concern and that it would be late in completing an annual report with securities authorities.

Before the news, significant SEN users, including Coinbase, Gemini, Paxos, Circle, Galaxy Digital, Cboe Digital, and Bitstamp, were already withdrawing their funds, citing the need for prudence.

Kraken, a cryptocurrency exchange, said on Tuesday that it is taking measures to guarantee that client and operational cash is safe and secure.

With no clear prospects for an SEN restart anytime soon, analysts and industry professionals are attempting to estimate how valuable the network was as a core component of the nascent crypto-markets infrastructure and whether other blockchain firms or even traditional banks might step in to fill the void.

Silvergate introduced SEN in 2018 and has achieved strong acceptance, with transaction volume expected to exceed $100 billion by the autumn of 2020. Almost all of the main cryptocurrency exchanges in the United States became Silvergate customers and began transferring funds via the network.

The SEN business was used as a marketing tool to entice crypto businesses to deposit funds with Silvergate.

Signature Bank, a New York-based crypto-friendly bank, has a program called Signet, which was introduced in 2019 and uses blockchain technology to allow for real-time payments. Currently, it is the only other banking option for SEN that enables quick US dollar payments to exchanges. Coinbase was formerly linked with Signature Bank’s Signet technology to give institutional customers real-time settlement and payment processing.

As such, it may well be clear that Signet will be the top alternative to SEN as soon as the network is gone with the fall of Silvergate.

FTX storm has exposed Silvergate’s weakness

Signature Bank filed its 10-K report on March 2 and presented its 2023 Q1 midterm financials update on Tuesday.

Both banks are inextricably linked to the FTX thunderstorm event, and they have both been questioned and charged with complicity or failure to report. Signature Bank, on the other hand, said in Q4 2022 that it would cut its crypto client deposit rate and make loans totaling more than $10 billion over the same time in order to alleviate the liquidity issue. The user has withdrawn his account.

Thus far, Signature Bank’s financial status has progressively improved, and Coinbase, Circle, and other companies have abandoned Silvergate in favor of Signature.

Signature Bank is a vital component and foundation of the US crypto economy. Customers in the United States and other locations already have legal deposit and withdrawal methods via crypto-friendly institutions. Silvergate’s SEN and Signature’s SigNet both serve as a bridge between crypto and fiat currencies.

The advantages of doing compared outweigh those of a stable monetary system without the FTX thunderstorm catastrophe. With the bank management system, regulators may immediately monitor cash flows. Clients such as exchanges and institutions may also secure huge sums of money in banks, and retail individual investors are not subject to the security risks associated with exchange funds.

Most crypto-friendly banks had operational challenges after the FTX crisis. Signature was slammed with a class-action complaint last month for its previous involvement with collapsed cryptocurrency exchange FTX, alleging Signature had real knowledge of and materially assisted the now-infamous FTX scam. Signature suspected fraud with FTX in early June 2020 but opted to disregard it for its own benefit, according to the latest statement.

Most crypto-friendly banks saw significant deposit losses in the third quarter of 2022. In terms of deposits, the two largest crypto banks, Signature Bank and Silvergate recorded quarterly discussions of 8.9% and 10.8%, respectively, in Q3 2022.

Signature said last year that it would decrease its exposure to the digital asset business by reducing bank deposits for crypto startups. In a statement issued on Wednesday, the bank underlined that priority.

Moreover, diversifying Signature’s operations is a must for aggressively minimizing crypto deposits. Signature began its corporate financing business in 2021, followed by its healthcare business in Q2 2022. Company diversification has also been profitable in terms of net income. Signature’s 2022 revenue was $301 million in the fourth quarter, compared to a $1.3 billion yearly net income.

Thus, it can be seen that Signature has carefully prepared for Silvergate’s situation to not be like that. Direct mitigation of restrictions on exposure to cryptocurrencies has been done in the past.

Thanks to FTX, Signature Bank was able to obtain a new stable scale as well as reduce risks later, creating a premise for sustainable development.

Signature’s current difficulty

Signature’s biggest issue is that its cash flow is still volatile. Although the bank claims that around 98% of financial loans are collateralized as of December 31, 2022, there are nevertheless some unsecured loans, which are typically held for persons with high net worth.

According to the 10-K filing, Signature Bank’s diverse business is flourishing, and it hasn’t completely abandoned the crypto sector; it still works with the majority of the big exchanges, and its current cash flow is solvent. Since Signature limits transactions to modest sums, Binance, Coinbase, and Kraken are progressively banning non-business or retail accounts that partner with the bank.

Moreover, loan size is constantly reduced to relieve cash flow strain, lower loan balances of bigger enterprises, cut spot mortgage loan amount by about $1.71 billion, and ensure that crypto assets will not be utilized as loan collateral.

Even so, shares of Signature Bank fell Thursday after Silvergate said it plans to wind down operations. This shows that the trust of institutions in digital assets is still shaken as the serious problem left by Silvergate has not been fully resolved.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Harold

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