The collapse of Silvergate and Silicon Valley Bank represents a challenge for crypto

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. 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 United States Securities and Exchange Commission.

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

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

This is particularly evident with stablecoins such as 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 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 due to how dependent they are on real assets. But in the long run, a situation like this could also put pressure on other major crypto players like Bitcoin (BTC) and Ether (ETH), which fell nearly 10% in the wake, with concerns mounting over a potential liquidity crunch for the industry.

To top it all off, the collapse of SVB and Silvergate has also stalled other banks, making them less likely to support new relationships with the crypto industry. This could make it more challenging 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 additional information yesterday. pic.twitter.com/oPr3WLZtk3

— Tom Emmer (@GOPMajorityWhip) March 16, 2023

Essentially, this whole situation creates a falling domino effect: When a major player at the center of a spiral holding the group together starts to wobble (in this case it was SVB and Silvergate), the rest of the construction will follow suit. when the central part has fallen to the ground.

The uncertainty and turmoil 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 essential aspects in the continued mass adoption of cryptocurrencies. In addition, without a stable banking partner, crypto companies may struggle to comply with regulations, which have already been a major obstacle for many crypto firms. Eventually, crypto companies will not be able to provide their services in a consistent manner, leading to their total downfall.

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

What has also not been helpful in this situation is the fact that the SEC has been looking to acquire crypto firms for a long time. SVB and Silvergate’s collapse means 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 traditional banking industry’s relationship with the crypto industry.

Why?

Because as the crypto industry continues to grow, traditional banks may be forced to rethink 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 any crypto operation by going after crypto companies and banks and trying everything in their power to shut them down. While this has not been proven by anyone yet, speculation within the wider crypto community continues to arise, with a number of crypto firms looking for banking partnerships outside US shores.

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

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