Signature's Signet provided path for Tether holders

Bloomberg News

(Bloomberg) — Tether Holdings Ltd. doesn't have direct access to the US banking system, but for a while it found at least one pathway: through Signature Bank. 

Tether instructed crypto clients to pay for its stablecoins by sending dollars to its Bahamas-based banking partner Capital Union Bank Ltd. via Signature's Signet payments platform, according to people with knowledge of the situation. While it's unclear when the setup started, it was in place when Signature Bank was seized by regulators last month, said the people, asking not to be identified because the information isn't public.

The arrangement underscores the difficulty crypto firms have had accessing a reluctant US banking system, even before Signature and crypto-friendly bank Silvergate Capital Corp. collapsed in March. A slew of blowups and general volatility have kept mainstream banks on the sidelines, prompting crypto firms to hunt for alternatives at smaller, more willing lenders.

The offshore stablecoin provider has never been sanctioned, and therefore doing business with the firm wouldn't be illegal, according to Alma Angotti, who held senior enforcement positions with the Securities and Exchange Commission and Treasury Department and is now a partner at the consulting firm Guidehouse. Still, banks are under regulatory expectations to know who's accessing their products and services, she said.

If Signature knew about and allowed the arrangement, that may speak to a high risk appetite, Angotti said.

"They may well have known and decided this is less risky than opening up an account for Tether directly."

Regulation and compliance

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Representatives for New York-based Signature and the Federal Deposit Insurance Corp., which took control of Signature on March 12, declined to comment. Representatives for Capital Union Bank, one of Tether's banking partners, didn't provide a response to repeated requests for comment.

"Banks used by Tether always had access to several banking channels and counterparties," Tether said in an emailed statement, adding that the company's risk management "enabled us to identify particular risks and weaknesses that others had missed, ensuring our entities wouldn't be affected by either direct or indirect exposure to Signature.

"Signet was a widely used payment network operated by Signature Bank that allowed crypto clients of the bank to send fiat dollars to each other to settle trades, including outside of normal business hours, matching the 24-hour nature of crypto transactions. 

Crypto Clients

U.S. prosecutors were investigating Signature Bank's work with crypto clients before regulators suddenly seized the lender, Bloomberg News reported last month. Justice Department investigators in Washington and Manhattan were examining whether Signature took sufficient steps to detect potential money laundering by clients, such as scrutinizing people opening accounts and monitoring transactions for signs of criminality, people familiar with the matter said.

The bank and its staff haven't been accused of wrongdoing, and the investigation could end without further action. Signature was seized by New York state regulators and handed over to the FDIC, which later sold Signature's deposits and some of its loans to a unit of New York Community Bancorp Inc. Signature's crypto-related deposits and the Signet network weren't part of the takeover deal. The shuttering of Signature and fellow crypto-friendly bank Silvergate Capital Corp. has made it difficult for crypto platforms and investors to transfer traditional currencies.

A boutique bank, Nassau, Bahamas-based Capital Union lists digital assets as one of its primary businesses, along with lending, wealth management and trading and execution. The company, founded in 2013, reported net income of $50.1 million and total assets of $1.56 billion in 2021. Capital Union and another Bahamian lender, Deltec Bank & Trust Ltd., look after Tether's cash reserves, while Cantor Fitzgerald LP is a custodian for Tether's Treasury-bill holdings.

For years, Tether has tried to get access to the US banking system. Executives of Tether and Bitfinex had attempted to open accounts at Signature in 2018, but the bank closed two accounts tied to the companies and rejected another attempt, the Wall Street Journal reported last month.

No Exposure

On the day of Signature's shutdown, Tether's chief technology officer, Paolo Ardoino, tweeted that the firm "doesn't have any exposure to Signature Bank."

In 2021, Tether and Bitfinex reached a settlement with New York Attorney General Letitia James over allegations that it hid the loss of commingled client and corporate funds and lied about reserves. Tether and Bitfinex didn't admit to or deny any wrongdoing. As part of the agreement, the companies were required to stop any trading activities with New Yorkers.

The ongoing US crypto clampdown has spooked investors, making the offshore Tether stablecoin an unlikely winner. The total value for Tether stablecoins in circulation has increased about 20% this year to nearly $80 billion, while the market value of its chief competitor, Circle's USD Coin, has shrunk 27% to $32.5 billion in the same period.

— With assistance from Olga Kharif and Beth Williams.