Signature Bank’s Crypto Deposits: What Happens Now After Flagstar Acquisition?

The dust continues to settle in the aftermath of the recent banking turmoil, and the crypto world is watching closely. Just a week after Signature Bank’s sudden closure, a significant development has emerged: Flagstar Bank, a subsidiary of New York Community Bancorp, is set to acquire a large chunk of Signature Bank’s assets. But here’s the critical detail for anyone in crypto: digital asset deposits are explicitly excluded from this deal. Let’s dive into what this means and why it matters to you.

What’s the Deal? Flagstar Bank Buys Signature, But Not Crypto

On March 19th, the Federal Deposit Insurance Corporation (FDIC) announced a “buy and assumption agreement.” This agreement dictates that Michigan-based Flagstar Bank will take over:

• $38.4 billion in deposits – but these are specifically non-cryptocurrency related deposits.
• $12.9 billion in loans.

Starting March 20th, Signature Bank’s 40 branches began operating under the Flagstar Bank banner. Importantly, the FDIC reassured depositors that all deposits assumed by Flagstar Bank will continue to be insured up to the standard $250,000 FDIC insurance limit. This provides a sense of security for traditional banking customers, but the crypto angle tells a different story.

The Crypto Catch: $4 Billion Left Out

Here’s the crux of the matter for the crypto community: the acquisition completely excludes the nearly $4 billion in deposits tied to Signature Bank’s digital assets business. The FDIC has stated that these crypto-related deposits will be directly returned to the customers who held digital banking accounts. In their words, “The FDIC will provide these deposits directly to clients whose accounts are affiliated with the digital banking business.”

To put this into perspective, this $4 billion represents about 4.5% of Signature Bank’s total deposits, which stood at $88.6 billion as of December 31st. While seemingly a small percentage of the overall pie, for the crypto industry, this exclusion raises significant questions and concerns.

Who’s Affected? Crypto Firms with Signature Exposure

Several prominent crypto firms have publicly acknowledged their exposure to Signature Bank. Among them are:

• Coinbase: A leading cryptocurrency exchange.
• Celsius Network: A crypto lending platform (currently undergoing bankruptcy proceedings).
• Paxos: A blockchain infrastructure platform and stablecoin issuer.

While the FDIC has stated that crypto depositors will get their funds back directly, the process and timeline remain unclear. For businesses reliant on these funds for operations, even a temporary disruption can have significant consequences.

Did the FDIC Contradict Itself? The Crypto Divestiture Debate

Last week, Reuters reported, citing sources, that any potential buyer for Signature Bank would be required to divest from crypto activities as part of a rescue plan. At the time, an FDIC spokesperson refuted this, stating that the agency wasn’t mandating crypto divestiture in any transaction.

However, with the current deal explicitly excluding crypto deposits, some industry observers are questioning the FDIC’s earlier statement. Nic Carter, a partner at Castle Island Ventures, has publicly stated that he believes the recent announcement shows the FDIC “lied” in its response to Reuters. This raises concerns about transparency and communication from regulatory bodies concerning the crypto industry.

Why the Crypto Exclusion? Speculation and Implications

While the FDIC’s official stance may be focused on streamlining the acquisition process, the exclusion of crypto assets from the Flagstar deal has fueled speculation about the underlying reasons. Here are a few potential interpretations:

• Regulatory Pressure: In the current climate of increased regulatory scrutiny towards crypto, authorities might be hesitant to allow traditional banks to deepen their ties with the digital asset space. This could be a sign of a broader push to separate traditional finance from the perceived risks of the crypto market.
• Complexity and Risk Assessment: Crypto assets and related businesses are often seen as more complex and carrying higher risks compared to traditional banking activities. Flagstar Bank, or the FDIC, might have deemed the integration of Signature’s crypto arm too complex or risky to undertake in a rapid acquisition.
• A Calculated Move to Isolate Crypto: Some speculate this could be a deliberate strategy to isolate the crypto industry from the mainstream financial system. By not including crypto in the deal, it could be interpreted as a signal that regulators prefer to keep a distance.

What Does This Mean for the Future of Crypto Banking?

The Signature Bank situation, and specifically the exclusion of crypto deposits in the Flagstar acquisition, sends a strong message to the cryptocurrency industry. It highlights:

• Increased Scrutiny: Crypto-related businesses and deposits are under intense regulatory scrutiny, and this is likely to continue.
• Banking Challenges: Finding reliable and crypto-friendly banking partners may become increasingly challenging for crypto firms.
• Decentralization Imperative: This event underscores the importance of decentralization and self-custody within the crypto space. Relying heavily on centralized intermediaries, especially in the traditional banking system, can expose crypto businesses and users to unforeseen risks.

Key Takeaways and Actionable Insights

For crypto businesses and individuals, the Signature Bank-Flagstar deal offers several key takeaways:

• Diversify Banking Relationships: Don’t rely solely on one bank, especially if it’s perceived as crypto-friendly. Diversify your banking relationships to mitigate risks.
• Monitor Regulatory Developments: Stay informed about regulatory changes and pronouncements related to crypto and banking. These developments can significantly impact the industry.
• Explore Decentralized Alternatives: Consider exploring decentralized finance (DeFi) solutions and self-custody options to reduce reliance on traditional intermediaries.
• Seek Clarity from FDIC: Crypto firms with deposits at Signature Bank should actively seek clear communication and timelines from the FDIC regarding the return of their funds.

In Conclusion: Navigating the Evolving Landscape

The acquisition of Signature Bank’s assets by Flagstar Bank, while excluding crypto deposits, marks another significant chapter in the ongoing saga of crypto’s integration with the traditional financial system. While the immediate impact is on firms with Signature Bank exposure, the broader implications are far-reaching. It serves as a stark reminder of the regulatory uncertainties and challenges that the crypto industry faces. Moving forward, proactive risk management, diversification, and staying informed will be crucial for navigating this evolving landscape and ensuring the resilience of the crypto ecosystem.