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

The fire lit by Silvergate Bank and Silicon Valley Bank will make it harder for crypto to find financial partners.

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 it will be even harder for them to comply with regulations and offer their services in a way that is consistent with the expectations of the United States Securities and Exchange Commission.

In the aftermath of the banks’ collapse, the second-most liquid U.S.-dollar pegged stablecoin, USD Coin (USDC), temporarily lost its peg and fell below $0.87, as its issuer, Circle, admitted that it held $3.3 billion at SVB. Within the crypto industry, Circle is one of the better-known, “mature” players, so the news understandably shook investors, forcing many to lose their confidence 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 for the infrastructure that enables crypto companies to operate.

This is especially evident with stablecoins like USDC that rely on banking partnerships to ensure their value is pegged to the U.S. 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 such as this can cause instability in the value of a stablecoin because of how dependent they are on real-life assets. However, in the long run, a situation like this could also put pressure on other major crypto players like Bitcoin (BTC) and Ether (ETH), which were down almost 10% in the aftermath, with concerns growing over a potential liquidity shortage for the industry.

To top it all off, the collapse of SVB and Silvergate has also brought other banks to a halt, making them less likely to endorse new relationships with the crypto industry. This could make it more challenging for crypto companies to find stable banking partners in the future.

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

In essence, this whole situation creates a falling domino effect: When a major player in the center of a spiral that holds the group together starts to wobble (in this case, it was SVB and Silvergate), the rest of the construction will follow suit once that central piece has fallen to the ground.

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

Related: Why isn’t the Federal Reserve requiring banks to hold depositors’ cash?

What has also not been helpful in this situation is the fact that the SEC has been out to get 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 up 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 reassess their relationships with crypto companies and the risks associated with those relationships.

In the U.S., it seems the government is actively trying to cease any crypto operations by going against crypto companies and banks and trying everything in its power to shut them down. While this was not proven by anyone yet, speculations within the wider crypto community continue to arise, with a number of crypto firms looking for bank partnerships outside American shores.

While the crypto community has managed to regain most of its losses since the bank collapses, the aftermath lingers as a reminder of the challenges the industry faces in the weeks and maybe even 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 here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.