The crypto industry lost a number of banking on- and off-ramps due to the recent turmoil in the U.S. banking industry, signaling that there may be a shift in the space toward decentralization and a need for regulation going forward.
Last week, Silvergate Capital, Silicon Valley Bank and Signature Bank all shut down or were closed, which resulted in crypto companies and users alike scrambling to move their assets.
“Silvergate and Signature serve as the major on- and off-ramps for the crypto space with their SEN and Signet products, respectively,” Aaron Rafferty, CEO of StandardDAO, said to TechCrunch+. “The tie for SVB was more on the side of major startup and VC capital for the space with organizations like Lightspeed, Y Combinator.”
The shuttering of these banks also has bigger implications on the crypto industry because some of them were providing services to the industry, Mina Tadrus, CEO of quant investment management firm Tadrus Capital LLC and general partner of Tadrus Capital Fund, said. “These banks enabled cryptocurrency traders and companies to deposit, transfer and convert fiat currency into digital assets such as Bitcoin, Ethereum and other cryptocurrencies.”
With these banks’ closure, it will become difficult for cryptocurrency businesses to move money between entities and access banking services, Tadrus noted. “Furthermore, such closures could mean reduced trust from investors who may no longer be aware of the necessary safeguards involved in their bank transactions.”
This could lead to an overall decline in participation within the crypto community and ultimately could decrease liquidity within crypto markets and make it difficult for crypto startups to build new products or remain operational in the long term, Tadrus added.
Alternative on-ramp and off-ramp solutions will vary, depending on need, through exchanges, peer-to-peer, marketplaces, digital wallets and so on, Tadrus said. Other avenues also include using remittance services such as MoneyGram or Western Union, making use of point-of-sale services, or paying by bank transfer or wire transfer through a broker that is compliant with the local regulations, he added.
As on- and off-ramps in the U.S. are shut down, the industry “needs to, once again, focus on building out an electronic cash system for crypto assets,” Stefan Rust, CEO of inflation data aggregator Truflation and former CEO of Bitcoin.com, said. “Let’s build out the ecosystem organically and make sure we can pay for utility in crypto and also connect crypto for remittance and payments of goods and services in the real world.”
While that is a long-term solution, at the moment, it will create a backlog of deals and stagnation in the crypto markets, Rafferty thinks. “In the longer term, we can expect to see a rise in alternative banking solutions that offer better terms and conditions, and perhaps more transparency to the industry as a whole, which will be beneficial for business.”
Additionally, investors and traders may be more likely to turn to more transparent and user-friendly solutions, such as the DeFi (decentralized finance) space, as a result of these events, Rafferty added.
Immediate effects on the crypto industry will also include operational issues like large exchanges looking for new providers to move U.S. dollars and potentially other currencies, Rust said.
“This is likely to only be short term, however, as there is always an alternative. It’s just an alternative at scale that will be the issue,” Rust added. “Some relatively small offshore banks may find themselves a recipient of quite a lot of capital over the coming days and weeks if Wall Street is not able to muscle in fast enough.” But that is going to depend entirely on the goodwill of U.S. regulators, Rust added.
“The implications of the closure of Silvergate, SVB and Signature is that the crypto industry has lost its major fiat on- and off-ramps,” Rust said. “This is a significant problem at any time, but at a time when the U.S. regulator is coming down on every cryptocurrency company like a ton of bricks, this is concerning.”
In recent months, the U.S. Securities and Exchange Commission has cracked down on the crypto industry. In February, it charged Terraform Labs and its founder, Do Kwon, with defrauding investors. Separately, crypto exchange Kraken faced a $30 million charge.
The U.S. Department of Justice charged the founder of an obscure crypto exchange, Bitzlato, in January for allegedly processing over $700 million of illicit funds. Last year, the DOJ also seized a whopping $3.36 billion in cryptocurrency from a man who “unlawfully obtained” over 50,000 bitcoin from the dark web market Silk Road over a decade ago.
These are just a few charges from the past year. Legislators are stepping into the ecosystem, too, aiming to create new (or modified) bills to monitor the burgeoning industry.
As regulators home in on the space, clarity still “needs to be set,” Rafferty stated. “It should be a no-brainer, but regulatory controls need to be put in place so any fiduciary is able to support custody of crypto assets without owning them.”
The contagion from these events could take many forms, Tadrus said. “As mentioned, it could cause an overall risk aversion toward crypto investments, as investors may become concerned about additional financial institutions encountering similar issues.”
But that doesn’t seem like the case right now.
The crypto market is showing a “positive contagion” after the SVB collapse, similar to what transpired in 2020 when investors fled traditional markets during the COVID-19 pandemic in favor of alternative assets, Rust noted.
In the past seven days, bitcoin and ether have increased by over 16% and 13%, respectively, according to CoinMarketCap data. The top 10 cryptocurrencies by market capitalization all increased during that period. Separately, the global crypto market capitalization is up 11.3% to $1.3 trillion during the same time frame, data shows.
“Even USDC, which lost its U.S. dollar mooring over the weekend, is back to $1,” Rust added. “Medium term, this hopefully leads to a more sustainable decoupling of crypto from main markets, which many industry participants have been eagerly awaiting.”
To find long-term stability, the crypto ecosystem needs to achieve greater decentralization, Rust thinks. “As we saw in 2022, centralization in cryptocurrency is fraught with risks. In fact, it wasn’t just 2022: As far back as Mt Gox in 2014, it has been proven time and time again that centralized entities in cryptocurrency tend to fail.”
Centralized crypto exchanges or projects fail due to vulnerabilities to hacks “from people much smarter than gun-wielding bank robbers and because crypto is transparent and accessible,” Rust said.
“In crypto, it really is ‘your keys, your coins.’ We have to get to a place where people are comfortable with custodying their own assets and interacting in a decentralized way on a decentralized blockchain. That is how we create a safe, accessible, equitable and transparent ecosystem.”
