The US banking meltdown that has so far claimed Silvergate, Signature and Silicon Valley Bank leaves crypto investors bruised and anxious about the spectre of tougher regulations as firms big and small lose access to funding.
Some even warn it may be an even bigger blow to the industry.
“Crypto in the US is dead” for firms that have links to the US financial system, one New York-based crypto trader, whose company lost access to financing, told DL News. “To be useful in real life it needs to be able to have APIs connected to banks. The government just nationalised the two networks that could do that in the USA.”
“Now, it’s like a scarlet letter” to be an American in the industry.
Regulators have been on the warpath for months. The US Securities and Exchange Commission has levied fines and enforcement actions against the likes of stablecoin issuer Paxos and exchange Kraken. And market watchdogs overseeing everything from commodities to banking have clamped down.
NOW READ: SEC vs crypto: A timeline of enforcement actions
Now, the agencies have even more of an excuse to ramp up their efforts.
“Any regulation made in the immediate aftermath of the SVB collapse could potentially be a knee-jerk reaction to the incident and not indicative of the actual issues,” Arjun Khazanchi, co-founder and chief legal officer at Rooba Finance, a blockchain infrastructure company, told DL News.
The brief plunge in Circle’s USDC stablecoin, which is pegged to the US dollar, also raised alarm bells among experts. The second-largest stablecoin, which had $3.3 billion in reserve deposits at SVB, plunged to 88 cents. Another stablecoin, MakerDAO’s DAI, dropped to 88 cents, as did the stablecoin issued by Frax Finance.
“It should give regulators some pause about the rush to give stablecoins the regulatory seal of approval,” said market infrastructure expert Sean Tuffy, a former Citigroup executive. “Do they really want to create another risk point, when there are already TradFi alternatives that do the same basic thing as stablecoins, just without the crypto magic?”
‘The worst nightmare has been avoided’
Lender stocks tanked on Monday amid fears of wider contagion, while banks linked to the crypto industry were suddenly unable to play the vital roles in the crypto sphere — they provided on-ramps allowing individuals to access Bitcoin and other crypto assets.
Over the weekend, startups worried that they would be unable to pay staff, provide their services or even stay afloat.
NOW READ: Crypto investors drive USDC rebound amid Silicon Valley Bank fallout
And the loss of banking partners for crypto companies may make it harder for companies to comply with regulations already on the books.
The US Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation scattered some of those fears by announcing that they would honour all deposits in both Silicon Valley Bank and Signature Bank.
Across the pond, banking giant HSBC scooped up the UK branch of Silicon Valley Bank on Monday, saying it would enable the bank’s customers to access accounts and services like normal.
“The worst nightmare has been avoided,” Sean Stein Smith, an assistant professor at City University of New York who serves on the Wall Street Blockchain Alliance’s advisory board, told DL News.
“To date many banks have been ‘protecting’ themselves from crypto exposure, by limiting or banning crypto transactions and demonstrating limited appetite for providing banking relationships and services to our sector,” said Su Carpenter, director of operations at CryptoUK, a crypto industry trade group.
“Given the recent turn of events, crypto firms must now consider how to ‘protect’ themselves and their customers from banking exposures.”
Wayne Scott, regulatory compliance lead at NCC Group Software Resilience, the risk mitigation firm, said the banking woes highlighted the need for more regulation.
“One of the only ways to properly mitigate the impact of inevitable future crashes is proper regulation and due diligence globally,” Scott told DL News.
Others said Silicon Valley Bank’s insolvency – caused by the twin pressures of the value of its bond portfolio plummeting in the face of skyrocketing interest rates and an old-fashioned bank run – suggested it was traditional finance that was broken, not DeFI.
NOW READ: Washington mulled letting crypto exchanges regulate themselves. That idea is dying
“This is the perfect advertisement for DeFi and for crypto assets,” Indraneel Basu-Majumdar, senior financial services solicitor at law firm Harper James, told DL News.
“If anything, it strengthens the argument that central regulatory control of traditional banking is not as safe as we think. DeFi handing back control of assets to consumers, and crypto assets as a mechanism to do that, looks suddenly more attractive.”
Edward Robinson, Ekin Genç, Ritvik Carvalho and Tim Craig contributed to this story.
This story was updated to add context to the New York trader’s comments, and to add comments from CryptoUK.