Cross River Bank – a venture capital-backed, FDIC-insured regional bank in New Jersey that’s part financial institution and part fintech – has an increased profile in crypto circles thanks to the collapses of crypto-friendly Silvergate Bank, Silicon Valley Bank and Signature Bank in under a week. The latter seemingly (but didn’t) lost its real-time payment infrastructure SigNet, forcing customer and USDC stablecoin issuer Circle to find another way to quickly settle its payments. On Sunday, Circle CEO Jeremy Allaire announced a new partnership with Cross River for automated settlements.
The bank collapses came at a particularly vulnerable time for a crypto industry trapped in an extended winter. Last year there were a number of headline-grabbing scandals, including the liquidity crisis and bankruptcy filing of multi-billion-dollar crypto exchange FTX. The collapses will also increase regulatory scrutiny of remaining crypto-friendly banks, with a particular eye on potentially thin balance sheets.
“Regulators who tend to fight the last war are certainly on guard right now – looking at banks, including Cross River, to make sure that they are sufficiently capitalized,” Jay Ritter, Cordell professor of finance at the University of Florida, told CoinDesk in an interview.
What is Cross River?
Founded in Fort Lee, New Jersey, in 2008, Cross River has grown to $9.9 billion in assets and has originated more than $100 billion in loans, according to its website. The state-chartered bank has the regulatory and compliance infrastructure to originate loans – unlike most traditional fintechs – and financial infrastructure like the Real-Time Payment system, which can facilitate crypto-to-fiat conversions at all hours, among other use cases.
A number of venture capital firms were exposed to the three bank collapses, and Cross River might seem like a natural move considering its ties to some top venture capital (VC) players. In 2017, the bank raised $28 million in a funding round backed by noted investors Battery Ventures, Andreessen Horowitz and Ribbit Capital. An approximately $100 million round was announced the following year, with $75 million of the total coming from an equity investment from global investment giant KKR. Battery Ventures, Andreessen Horowitz and Ribbit Capital returned as backers.
However, bank runs that took out Silvergate Bank, Silicon Valley Bank and Signature Bank were partly due to the role traditional tech companies played among the bank's clients, which have become a higher-risk asset in this high-interest-rate environment. Cross River Bank also has deep tech exposure, providing financial infrastructure for the likes of Coinbase and Stripe and originating loans for fintechs such as buy now, pay later service Affirm.
How we got here
While the collapse of crypto-friendly Silvergate Bank had been telegraphed by the firm’s inability to file a financial statement due to concerns of its independent auditors and accounting firm, the demise of Silicon Valley Bank – popular in both crypto and general tech circles – was more sudden. That bank run helped inspire one at Signature Bank, which collapsed days later.
“Where Silicon Valley Bank got into trouble is that they had a mismatch in the duration of their assets and liabilities,” explained Ritter. “They invested a fair amount in longer-maturity Treasury bonds and mortgage-backed securities, and when interest rates went up [the bonds] fell in value. But bank accounting allows them to keep a lot of that on their balance sheet at historical cost, not representing current market value.”
“But that doesn’t mean that regulators can’t pay attention to current market value and see how much of the equity capital has been wiped out If those securities were marked to market,” he continued. “I’m sure with Cross River Bank, that’s one of the things that regulators will be looking at to make sure that it didn’t fall into the same problem that SVB did with basically gambling on interest rates and losing,” he added.
Cross River isn’t the only bank that crypto companies are considering for payment infrastructure. Circle has moved its USDC reserves to BNY Mellon. Tribe Capital managing partner Boris Revsin, in an email to CoinDesk, mentioned Arizona-based Western Alliance Bank as one of the “innovative banks” that can still offer payment infrastructure to crypto firms. Any bank that steps in to fill the void will have more attentive eyes turned in its direction.
“Everybody has viewed the crypto space as relatively risky due to the high incidence of fraud and crypto theft that there has been. FTX certainly raised the regulatory scrutiny there,” said Ritter. “Regulators are going to be looking at banks in terms of that interest rate exposure and the crypto exposure. And I think it's pretty hard for a bank right now to hide things as compared to a week ago.”
CoinDesk reached out to Cross River for comment but had not received a response by publication time.
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