Examining the intersection of cryptocurrency and government

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Welcome to State of Crypto. Here’s what’s important in policy news this week:

It seems the crypto industry still has some questions about Signature and Silvergate’s shutdowns. Plus, I’m in Washington, D.C., for a few days this week attending the DC Blockchain Summit on Tuesday and the CFTC Technology Advisory Committee meeting on Wednesday. Say hi if you’re there!

— Nikhilesh De

(Leonardo Munoz/VIEWpress/Getty Images)

We’ve still got some unanswered questions about the Signature and Silvergate bank shutdowns. What kinds of issues forced those shutdowns? Did Silvergate voluntarily repay its FHLB loans? Just how much money did Signature lose in deposits?

I think it’s safe to assume people want certainty. Companies want to know they’ll be able to tap banking services. For that to happen, banks need to be comfortable serving crypto companies. And for that to happen, they probably need to know what factors led to Signature becoming a failed bank – was it, as so much of the industry keeps saying, the mere fact it served crypto clients? Or was it because the bank itself had some deeper issues?

Things are pretty weird.

On Sunday, the Federal Deposit Insurance Corporation announced that Flagstar Bank, a subsidiary of New York Community Bancorp, would acquire the assets of Signature Bank – except for about $4 billion in crypto-related deposits. The Federal Deposit Insurance Corporation will dispose of those on its own (and in the meantime, the FDIC continues to operate Signature’s Signet system).

The news came days after Reuters reported the FDIC was telling potential bidders they would not be able to bid on the crypto parts of Signature’s business, a claim the FDIC denied. 

This came days after my colleague Helene Braun reported the Federal Home Loan Bank of San Francisco denied it forced Silvergate Bank to repay its loans, though FHLB declined to answer whether that meant it refused to roll its advance to Silvergate. 

My colleague Jesse Hamilton also reported Monday that major banks aren’t rushing to fill the Signature/SIlvergate-shaped hole for crypto companies. A number of major banks have outright said they are not looking to provide services for the crypto industry, or at least not for companies that engage directly with tokens. Other banks are willing to work with companies that invest in companies that deal with crypto – they’re OK with crypto at a distance, basically. 

Suffice to say, however, there seems to be more to the story behind Signature and Silvergate than we know at this moment. Both banks appeared to experience major outflows prior to their respective shutdowns. While we don’t have reliable figures for Silvergate at this time, we can compare Signature’s last reported figures with what the FDIC has shared.

On March 8, Signature reported it held over $89 billion in deposits, about $16.5 billion of which were tied to the crypto industry. As of March 19, the crypto deposit figure was down to $4 billion – suggesting that more than $12 billion in deposits from crypto companies left Signature in a very short period of time. 

If other depositors followed suit, a good chunk of Signature’s deposits may have left after that March 8 press release. Barney Frank, the former congressman and current Signature Board member going around saying it was shuttered due to politics or crypto, said $10 billion left the bank on March 9. 

We’re also still waiting on updated figures from between March 12, when the New York Department of Financial Services seized Signature, and March 19, when the FDIC approved Flagstar’s bid. 

All this is to say we’re in a pretty weird spot in terms of guessing what the future may look like for crypto companies seeking banking services. It’s almost a throwback to years past, when crypto companies couldn’t secure reliable banking services on their own. 

The U.S. Supreme Court will hear arguments in its first-ever crypto-related case on Tuesday, when lawyers for San Francisco-based crypto exchange Coinbase will attempt to convince the nine Justices to pause a pair of class-action lawsuits against the crypto exchange.

Though the case the high court will hear Tuesday involves crypto, it is not itself a crypto case. Instead, this case is a fairly esoteric, procedural argument over whether a lawsuit can proceed in federal court while one party – in this case, Coinbase – is attempting to send the dispute to arbitration.

Coinbase is in the process of appealing an earlier decision by a federal court in California allowing the two lawsuits, Bielski v. Coinbase and Suski v. Coinbase, to continue, in contrast with Coinbase’s user agreement, which requires disputes to be sent to arbitration. Arbitration is an out-of-court method of dispute resolution in which the odds are often unfairly stacked against consumers.

The U.S. District Court for the Northern District of California denied Coinbase’s motion to compel arbitration in the Bielski case last April, arguing the exchange’s arbitration clause as written is “unconscionable” and uses a “litigation gimmick” to disadvantage users in the case of a dispute. When Coinbase appealed with the next-highest court, the San Francisco-based 9th U.S. Circuit Court of Appeals, in July, the decision was upheld.

Coinbase has become something of a magnet for class-action lawsuits, with judges swatting down some attempts and allowing others to forge ahead. The suits have covered a wide range of issues, from allegations the exchange sold unregistered securities (after the U.S. Securities and Exchange Commission deemed certain tokens to be securities) to claims the exchange mishandled its public listing.

Still other lawsuits have been tied to complaints about hacks and lax security, including Bielski’s, which alleged that Coinbase broke the law in failing to reimburse him for over $31,000 he lost after being targeted by a scammer posing as a PayPal representative.

The other case the Supreme Court will review on Tuesday, Suski v. Coinbase, concerns a million-dollar sweepstakes event the exchange held in June 2021. Suski and other customers say they were misled by advertising that suggested they needed to buy or sell $100 in dogecoin for a chance to win, when in reality users who didn’t trade dogecoin were also eligible.

As the lawsuits continue to mount, Coinbase has been forced to play an increasingly frantic game of legal whack-a-mole. If the exchange gets its desired outcome from the Supreme Court, future suits could be forced into arbitration – which makes it easier for Coinbase to deal with them.

Though the eventual decision will not set a precedent either way for the most important issues facing crypto, it could have a significant impact on the emerging litigation landscape in the crypto sphere. It would also have wide-ranging implications for other crypto companies that have increasingly been targeted by class-action lawsuits.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde. 

You can also join the group conversation on Telegram. 

See ya’ll next week!

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