U.S. Banking Crisis Could Strengthen Crypto Long Term, Experts Say

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Brushing off bearish sentiment that has emerged in crypto circles over the past few days, some market observers say the breakdown of crypto-focused banks can have benefits for the crypto ecosystem over the long term.

Last week, stocks fell as regulators shut Silicon Valley Bank after investors withdrew their deposits en masse. The news hit crypto markets a day later when traders reacted to reports that USD coin (USDC) issuer Circle Internet Financial held over $3.3 billion in reserves at Silicon Valley. That led to USDC redemptions and to the price of the coin, which is supposed to be pegged to $1, falling to as low as 87 cents.

In a separate move, crypto-focused Signature Bank (SBNY) was shut by regulators over the weekend.

The collapses of Silicon Valley Bank and Signature Bank came shortly after Silvergate Bank, another banked that dealt mainly with crypto, imploded.

Signature is now on the market, but any potential buyer reportedly has to agree to a major caveat: no services to crypto companies, as CoinDesk reported.

But founders and developers of crypto firms remain focused on expanding the crypto universe, despite the scrutiny.

“In the near term, this (unbanking) could add to the increased regulatory scrutiny on crypto and the banking rails that serve crypto, and closer scrutiny of crypto’s contribution to systemic risk,” Ramani Ramachandran, co-founder and CEO of Router Protocol, said.

“It will also increase scrutiny on stablecoins such as USD tether, which were already under the spotlight even before the current USDC depeg,” he added.

Jonathan Zeppettini, head of international operations at cryptocurrency issuer Decred, said: "The situation with Silvergate, Silicon Valley Bank and Signature is a combination of a few things banks failing to properly hedge interest rate risk, a classic bank run stemming from that illiquidity as they are forced to realize losses if they do not hold those assets to maturity and opportunism by regulators to force the unwind of banks that are seen as 'crypto-friendly.'”

The “attempt to restrict liquidity” was the result of governments trying to strangle many of the weaker, relatively unregulated players and eventually set back adoption, he said.

Zeppettini, whose long-term outlook remains optimistic, said clampdowns could eventually create a more robust crypto economy.

“It may end up having the opposite effect as exchanges and other players in the industry move offshore to jurisdictions that are courting financial technology innovators, leading to more robust infrastructure and less hostility,” he said.