- Insider asked crypto execs and experts where the industry will go after critical partners failed.
- Markets are at risk of more volatility and less liquidity in the near term, one cofounder said.
- Others see a bull case for decentralized finance and parking assets in non-custodial wallets.
Crypto is facing a banking problem, with three of the industry’s crucial financial partners shuttering in the past week.
Silicon Valley Bank, Silvergate Capital, and Signature all closed, and each had distinct ties to the trillion-dollar market.
Crypto-friendly venture capital funds and digital asset firms held cash with SVB, which is now the second-largest bank failure in history. Circle, the company behind the number 2 stablecoin USDC, holds $3.3 billion in cash reserves with the now-fallen bank.
Silvergate, which served crypto clients like Coinbase and Kraken, also closed after a prolonged drop in customer deposits that began last year, along with a slew of other financial issues. And on Sunday, Signature was seized by regulators after concerns that the banking crisis would spread.
The surprising failure of the crypto-friendly banks is “undoubtedly a significant blow to the industry,” a blockchain exec told Insider, adding that if alternatives cannot be found it will be “challenging for the industry to recover to its former glory.”
“One of the trends that contributed to the crypto industry’s growth since 2017 was the increasingly close connections between regulated financial institutions, centralized crypto services, and decentralized finance,” Ran Hammer, Vice President of Business Development of blockchain infrastructure provider Orbs, said.
Hammer added: “However, with significant macroeconomic changes in the financial world, the delicate balance that existed seems to have spun out of control, resulting in massive failures in [centralized finance] and now also legacy financial institutions.”
More volatility and banking alternatives
Both Silvergate and Signature offered real-time payment platforms for clients, shoring up liquidity for some of crypto’s biggest players.
Now markets are at risk of increased volatility and decreased liquidity of certain tokens in the near term, Thanh Nguyen, cofounder of blockchain security firm Verichains Lab, told Insider.
Meanwhile, a renewed interest in central bank digital currencies (CBDCs) may occur as the industry recovers from a crisis in confidence after jitters in stablecoin markets.
“CBDCs could provide a more secure and stable means of entering the crypto market by allowing investors to directly purchase and hold CBDCs, without the need for intermediaries such as banks, which in turn could help to mitigate the impact of the bankruptcy of crypto-friendly banks,” Nguyen said.
Others saw the fallout as a bull case for decentralized finance, specifically parking assets in non-custodial wallets and out of a third-party intermediary.
“The Fed’s policies have brought into focus the shortcomings of the banking system and made the case for the self-custody that decentralized cryptocurrencies were designed to provide,” Andrei Grachev, managing partner at digital asset market maker and investment firm DWF Labs, told Insider.
And a blockchain gaming exec said the relationship between traditional banks and crypto has also taken another massive hit, which could impact the US lead on crypto innovation as well.
“This situation again opens up an opportunity for financial institutions in other jurisdictions to take a lead on this,” Oleg Fomenko, cofounder of blockchain gaming developer Sweat Economy, told Insider.
Finally, banking and financial institutions will face more investigations and de-leveraging in the coming months.
Youwei Yang, Chief Economist at crypto mining firm BTCM, told Insider that the ecosystem could revert back to the era when no major bank would do business with crypto.
However, the SVB fallout could make crypto purer, as its original purpose as a peer-to-peer cash system gets more emphasis, Yang added. “DeFi will grow to combat the shortage of bank access, as you can see the recovery of DeFi sector over the weekend was extraordinary.”