Collapse of Silvergate and Silicon Valley Bank represent a challenge for crypto

The collapse of Silicon Valley Bank (SVB) and Silvergate Capital, some of the most crypto-friendly banks in the industry, forced many crypto firms to hold their breath. The loss of a significant banking partner for many companies means that it will be even more difficult for them to comply with regulations and offer their services in a manner consistent with the expectations of the US Securities and Exchange Commission.

In the wake of the bank collapse, the second most liquid US dollar-pegged stablecoin, USD Coin (USDC), temporarily lost its peg and fell below $0.87, as its issuer, Circle, admitted it was holding $3.3 billion at SVB. Within the crypto industry, Circle is one of the more well-known, “mature” players, so the news understandably shook investors, forcing many to once again lose their faith in cryptocurrencies.

It is obvious that the collapse of SVB and Silvergate has and will continue to challenge the crypto industry as a whole. On top of that, it has also created uncertainty, as banking partnerships are crucial to the infrastructure that enables crypto companies to operate.

This is particularly evident with stablecoins such as USDC, which rely on banking partnerships to ensure their value is tied to the US dollar. But what does the collapse of a banking partner mean for the future of stablecoins and the overall crypto industry?

Related: Blame traditional finance for the collapse of Silicon Valley Bank

In general, a collapse like this can cause instability in the value of a stablecoin because of how dependent they are on real assets. However, in the long term, such a situation could also put pressure on other major crypto players such as Bitcoin (BTC) and Ether (ETH), which fell almost 10% in the aftermath, with concerns growing over a possible liquidity shortage for the industry.

On top of that, the collapse of SVB and Silvergate also put other banks on hold, making them less likely to support new relationships with the crypto industry. This could make it more difficult for crypto companies to find stable banking partners in the future.

It is clear that the Biden administration is weaponizing market chaos to kill crypto.

This is why I sent a letter of inquiry to FDIC Chairman Gruenberg seeking more information yesterday. pic.twitter.com/oPr3WLZtk3

— Tom Emmer (@GOPMajorityWhip) March 16, 2023

Basically, this whole situation creates a falling domino effect: When an important player in the center of a spiral that holds the group together begins to falter (in this case, it was SVB and Silvergate), the rest of the construction will follow suit. after that central piece fell to the ground.

The uncertainty and anxiety that followed the collapse of both SVB and Silvergate is likely to have a knock-on effect on investor confidence, adoption and growth, which are vital aspects in the further mass adoption of cryptocurrencies. In addition, without a stable banking partner, crypto companies may struggle to comply with regulations, which have already been a key obstacle for many crypto firms. In the end, crypto companies will not be able to offer their services consistently, leading to their total downfall.

Related: Why doesn’t the Federal Reserve require banks to hold depositors’ money?

What was also not helpful in this situation is the fact that the SEC has been in favor of acquiring crypto firms for a long time. The collapse of SVB and Silvergate means that crypto firms will now be more vulnerable to increased scrutiny from regulators regarding their reliance on stablecoins and banking partnerships. In addition, this will also bring wider implications for the relationship of the traditional banking industry with the crypto industry.

Why?

Because as the crypto industry continues to grow, traditional banks may be forced to reevaluate their relationships with crypto companies and the risks associated with those relationships.

In the US, it seems that the government is actively trying to stop any crypto operations by going after crypto companies and banks and trying everything in their power to shut them down. Although this has not been proven by anyone yet, speculation within the wider crypto community continues to emerge, with some crypto firms seeking banking partnerships outside of American shores.

While the crypto community has managed to recover most of its losses since the collapse of the bank, the aftermath remains as a reminder of the challenges the industry faces in the weeks and perhaps even months to come.

This article is for general information and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.