Crypto Observers Believe U.S. Banking Crisis Could Strengthen Crypto Ecosystem in the Long Term

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

Last week, financial markets saw a sudden and steep fall as regulators shut Silicon Valley Bank with investors withdrawing capital en masse. The news hit crypto markets a day later after traders reacted to reports of USD Coin (USDC) issuer Circle holding over $3.3 billion in reserves at Silicon Valley. This ultimately led to USDC redemptions and a depegging to as low as 87 cents.

In a separate move, crypto-friendly bank Signature was shut over the weekend, less than a week after the closure of another California-based bank, Silvergate. The three defunct banks were known for being crypto-friendly financial institutions.

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 growing the ecosystem instead of getting dissuaded, 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,” shared Ramani Ramachandran, co-founder and CEO of Router Protocol, in a message to CoinDesk.

“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.

Elsewhere, Jonathan Zeppettini, strategy Lead at 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.”

Zeppettini opined that the ongoing “attempt to restrict liquidity” was the result of governments trying to strangle many of the weaker, relatively unregulated players and eventually set back adoption.

Zeppettini, whose long-term outlook remains optimistic, said the ongoing 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 opined.