The failure of Silicon Valley Bank (SVB) and Silvergate Capital, two of the industry’s most crypto-friendly banks, has caused numerous crypto firms to hold their breath. The loss of a significant banking partner will make it harder for many businesses to follow the rules and provide services in line with what the U.S. Securities and Exchange Commission wants.
The second-most liquid stablecoin pegged to the U.S. dollar, USD Coin temporarily lost its peg and fell below $0.87 as its issuer, Circle acknowledged its $3.3 billion holding at SVB after the collapse of the institutions. Circle is a well-known and “mature” crypto company, so the news understandably shook investors, causing many to lose faith in cryptocurrencies again.
The failure of SVB and Silvergate has considerably impacted the entire cryptocurrency industry. Moreover, it has created uncertainty because banking partnerships are essential to the infrastructure that enables crypto companies to operate.
This is particularly true for stablecoins such as USDC, which rely on banking partnerships to ensure their value is pegged to the U.S. currency. However, what does the failure of a banking partner imply for the future of stablecoins and the crypto industry as a whole?
As stablecoins depend on real-world assets, such collapse can typically lead to price volatility. Concerns about a prospective liquidity scarcity in the industry grew as a result.
In addition, the failure of SVB and Silvergate has halted other institutions, making them less likely to endorse new partnerships with the cryptocurrency industry. This could make it more difficult for crypto companies to secure stable banking partners.
It’s clear the Biden administration is weaponizing market chaos to kill crypto.
This is why I sent an investigative letter to FDIC Chairman Gruenberg seeking additional information yesterday. pic.twitter.com/oPr3WLZtk3
— Tom Emmer (@GOPMajorityWhip) March 16, 2023
Essentially, this entire circumstance produces a domino effect: When a significant participant in the centre of a spiral that holds the group together begins to falter (in this instance, it was SVB and Silvergate), the remainder of the structure will collapse once the central component has fallen.
The uncertainty and apprehension that followed the collapses of SVB and Silvergate are likely to lower investor confidence, adoption, and growth, all of which are crucial for the continued mass adoption of cryptocurrencies. Also, if crypto companies have a trustworthy banking partner, it might be easier to follow the rules, which is already a big problem for many crypto companies. Ultimately, crypto enterprises will be unable to provide their services, resulting in their demise.
The fact that the SEC has been out to get crypto companies for a very long time has also not been beneficial in this situation. As a result of the failures of SVB and Silvergate, crypto firms will be subject to increased regulatory scrutiny regarding their reliance on stablecoins and banking partnerships. This will also have a more significant effect on how the traditional financial and cryptocurrency industries work together.
Why? Conventional banks may be compelled to reevaluate their relationships with crypto companies and the associated risks as the crypto industry expands.
The U.S. government is actively attempting to end crypto operations by going after crypto companies and institutions and doing everything possible to bring them down. Even though no one has proven this, rumours keep going around in the crypto community, and several crypto companies are looking for bank partnerships outside of the U.S.
Even though most of the crypto community’s losses have been made up since the bank failures, the aftermath is a reminder of the industry’s problems in the coming weeks and even months.