Signature Bank was one of the dwindling financial options for the U.S. crypto industry, even after New York regulators took over the bank and placed it into Federal Deposit Insurance Corporation receivership over the weekend.
Now, as potential buyers circle the failed lender, the FDIC is mandating that they agree to give up the bank’s crypto business, according to a Wednesday report from Reuters.
The circumstances around the New York–based bank’s failure have bred controversy in the U.S. crypto industry. Signature was one of the few U.S. banks that would offer financial services to blockchain companies, made even more popular by its real-time payment processor Signet, used by firms like the USDC issuer Circle to process transactions after business hours.
Despite the bank’s stature in the crypto industry, the volatile sector only composed about 25% of Signature’s deposit base, with the bank mostly serving middle-market businesses such as real estate and law firms.
As the crypto bear market accelerated, Signature sought to reduce its exposure, with the CEO announcing in December that it would shrink its crypto deposits by $2 billion as its share price dropped.
When the crypto-friendly Silvergate Bank collapsed last week, many crypto firms fled to Signature—an exodus that caused some of Signature’s more traditional clients to find safer options, according to a Wall Street Journal report from Wednesday.
Then, when the New York Department of Financial Services took possession of Signature on Sunday, bank board member Barney Frank—a former representative who helped design the banking reform Dodd-Frank legislation—gave a series of interviews in which he blamed the takeover on Signature’s crypto exposure. A DFS spokesperson denied the allegations, telling Fortune that the bank failed to provide reliable and consistent data, creating a “significant crisis of confidence in the bank’s leadership.”
Despite the denial from DFS, speculation continued to spread amid the crypto industry that the Signature takedown was motivated by its crypto-friendly stance, with the forced failure part of a broader regulatory “Operation Choke Point 2.0” to sabotage crypto in the United States, referencing a previous Department of Justice initiative to target banks working with certain sectors.
Amid the uncertainty, the FDIC kept Signature’s Signet platform operational. Although Circle stopped using the processor, Coinbase announced it was operational as usual.
“Signet continues to function, and all past and future customer deposits continue to be FDIC-insured,” a Coinbase spokesperson told Fortune in a statement on Wednesday.
The report from Reuters signals that Signature’s future as a crypto-friendly bank is in doubt. According to unnamed sources, the FDIC is aiming to sell Signature in its entirety, using the investment bank Piper Sandler to run an auction. In addition to any buyer of Signature agreeing to give up its crypto business, Bloomberg also reported on Tuesday that U.S. prosecutors were investigating Signature’s work with crypto clients before the DFS takeover.
The FDIC did not immediately respond to a request for comment.
The decision would likely end access to the crucial Signet platform for crypto companies, which would have to search for other options. In their Wednesday statement to Fortune, the Coinbase spokesperson said that if Signet ended, there would be other players in the market to fill the void.
“As we saw over the weekend,” the spokesperson said, “crypto is resilient, and we would absorb this and move on just as we have in other events.”