The collapse of Silicon Valley Bank (SVB) and Silvergate Capital, some of the most crypto-friendly banks in the industry, has forced many crypto firms to hold their breath. For many companies, the loss of a significant banking partner means that it becomes even more difficult for them to comply with regulations and offer their services in a manner that meets the expectations of the United States Securities and Exchange Commission.
After the banks collapsed, the second most liquid USD-pegged stablecoin, USD Coin (USDC), temporarily lost its peg, falling below $0.87 as its issuer Circle admitted it held $3.3 billion in SVB. Within the crypto industry, Circle is one of the better-known, “mature” players, so the news understandably shook investors, forcing many to lose faith in cryptocurrencies yet again.
It is evident that the collapse of SVB and Silvergate has challenged and will continue to challenge the entire crypto industry. Additionally, it has also created uncertainty as banking partnerships are vital to the infrastructure that enables crypto businesses to operate.
This is particularly evident with stablecoins like USDC, which rely on banking partnerships to ensure their value is pegged to the US dollar. But what does the collapse of a banking partner mean for the future of stablecoins and the entire crypto industry?
Related: Blame traditional finance for the collapse of Silicon Valley Bank
In general, a crash like this can lead to instability in a stablecoin’s value because of its reliance on real assets. In the longer term, however, such a situation could also put pressure on other major crypto players such as Bitcoin (BTC) and Ether (ETH), which have subsequently declined nearly 10%, with concerns over a potential liquidity squeeze growing in the industry.
To top it off, the collapse of SVB and Silvergate has also brought other banks to a standstill, making them less likely to form new relationships with the crypto industry. This could make it harder for crypto companies to find stable banking partners in the future.
It is clear that the Biden administration is arming the market chaos to kill crypto.
Because of this, yesterday I sent an investigative letter to FDIC Chairman Gruenberg for additional information. pic.twitter.com/oPr3WLZtk3
— Tom Emmer (@GOPMajorityWhip) March 16, 2023
Essentially, this whole situation creates a falling domino effect: if a key player starts to wobble at the center of a spiral holding the group together (in this case it was SVB and Silvergate), the rest of the construction will follow suit once that central piece falls to the ground is.
The uncertainty and unease that followed the collapse of SVB and Silvergate are likely to impact investor confidence, acceptance and growth, which are essential aspects in the continued mass adoption of cryptocurrencies. Additionally, without a stable banking partner, crypto businesses can struggle to comply with regulations, which is already a major hurdle for many crypto firms. In the end, crypto companies will not be able to offer their services in a unified way, leading to their total demise.
Related: Why doesn’t the Federal Reserve require banks to hold depositors’ cash?
What also didn’t help in this situation is the fact that the SEC has long been out to get crypto firms. The collapse of SVB and Silvergate means crypto firms are now more vulnerable to increased scrutiny from regulators over their reliance on stablecoins and banking partnerships. Additionally, this will also have wider implications for the traditional banking industry’s relationship with the crypto industry.
Why?
As the crypto industry continues to grow, traditional banks may be forced to reassess their relationships with crypto companies and the risks associated with those relationships.
In the US, the government seems to be actively trying to shut down all crypto operations, cracking down on crypto companies and banks and trying everything in their power to shut them down. While this hasn’t been proven by anyone yet, speculation continues within the broader crypto community, with a number of crypto firms looking for banking partnerships outside of the American shores.
While the crypto community has managed to recoup most of its losses since the bank collapse, the aftermath is a reminder of the challenges the industry will face in the coming weeks and maybe even months.
Daniele Servadei is co-founder and CEO of Sellix, an e-commerce platform based in Italy.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
