Shares in Signature Bank have recovered faster than much of the backsliding cryptocurrency market the New York bank has been trying to corral.
Over the last two weeks, the company’s stock price has regained much of the ground that it lost in early May, thanks to a mid-quarter update that Signature released on May 16 and reassuring statements by outside analysts.
In its mid-quarter update, the $121.8 billion-asset company disclosed that $1.39 billion in deposits had flowed out of the bank since March 31. But the bank also said that it did not extend its services to the riskiest crypto administrators, which have seen their public offerings collapse in the past month.
In addition, the bank said that it has avoided crypto businesses that could not demonstrate the ability to hold one-for-one reserves in U.S. dollars to the digital coins they put out for investors.
“We never opened an account at the bank for these types of instruments,” said Scott Shay, chairman and co-founder of the bank, during a May 17 event hosted by Ernst & Young.
Signature made a name for itself in 2019 when it became the first Federal Deposit Insurance Corp.-insured institution to launch a blockchain-based digital payments platform, which it called Signet.
Through Signet, the bank offered crypto clients traditional banking services, like the ability to hold their deposits, and newer blockchain payment rails that processed transactions in real time.
Since then, the bank has moved quickly — striking partnerships with some of the largest crypto businesses and even began preparing to offer select Bitcoin-backed loans, though CEO Joseph DePaolo told American Banker last year that “we’ll underwrite it to death.”
The bank has only done one such loan backed by crypto as a test of the product, according to Wells Fargo analysts.
In recent weeks, clients have raised questions about whether the bank known for its forward thinking on digital finance may have been caught off-guard by the collapse of several crypto products.
Some of the most complicated crypto offerings like Terra and Luna collapsed to zero in the recent downturn, dragging the price of other currencies down with them. Bitcoin, for instance, has been hovering around $30,000 in recent weeks — about half of its value last November.
Shares in Signature initially started to follow suit, falling 29% in the two weeks after they reached $263.35 on May 3. But since the bank’s May 16 disclosure, its stock price has risen 16%.
Signature had $29 billion in deposits from digital currency clients — about 27% of its overall deposits — as of March 31.
But the company also held about $26 billion in reserves, and even more capacity to borrow enough to cover a mass run on deposits from this line of business, which would likely mean Bitcoin had collapsed to $0, analysts at Raymond James wrote in a May 16 note.
“As we pointed out in our review this morning, fears of mass deposit run-off within its digital currency ecosystem business are overblown,” the analysts said.
Analysts at Jefferies said in a note to clients the same day that “the deposit balance update is likely strong enough to allay the worse case fears” about the bank’s crypto franchise.
Analysts at Wells Fargo went a step further in a May 16 note to clients, saying that Signature has so much reserve liquidity “that some deposit outflows aren’t necessarily unwelcome.”
Extreme volatility in crypto prices could mean that Signature possibly stands to gain from the recent chaos in crypto markets, the Wells Fargo analysts wrote. That would occur as a result of more trading volume at Signature’s biggest exchange clients, such as Coinbase.
For now, Signature has not indicated it is backing away from the crypto space — despite the recent fall in digital currency prices.
Shay explained the recent downturn by pointing to largely unaudited smart contracts that were “exploited by the Gordon Gekko set” — a nod to the antagonist in the 1987 film Wall Street.
“In order to have mass adoption of [decentralized finance] and of cryptocurrencies, they’re going to have to become — and we’re going to have to come to grips with this — they’re going to have to become a lot more regulated,” Shay said.
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