The fall of crypto-friendly banks: What it means for the crypto sector

The crypto industry has encountered a banking crisis in the past week, with the closure of three significant financial partners. Silvergate, which provided banking services to major crypto clients such as Coinbase and Kraken, closed due to a decline in customer deposits and other financial issues. Silicon Valley Bank, which had crypto-friendly venture capital funds and digital asset firms as customers, has now become the second-largest bank failure in history. The Signature bank was also seized by regulators on Sunday due to concerns about the banking crisis spreading.

All three banks played a crucial role in facilitating fiat on-ramps for digital asset exchanges and enabling real-time payments, resulting in increased market liquidity. As a result, the crypto sector is left with limited options for traditional banking services, leaving many businesses in search of alternatives. With OKCoin being just one of the many unable to process USD deposits on behalf of customers, the industry is bracing for more disruptions.

On Wednesday, Silvergate Capital, which had been a primary lender to the crypto industry, announced that it would be winding down its operations and liquidating its bank. Silicon Valley Bank served as a banking partner for venture capital funds and digital asset firms involved in cryptocurrencies. For example, Circle, the company responsible for the second-largest stablecoin, USDC, had cash reserves totaling $3.3 billion with the bank, which has since collapsed.

Silvergate and Signature had been providing essential banking services to the cryptocurrency industry. Silicon Valley Bank was also a popular choice among crypto startups and venture capital firms. On Sunday evening, Signature, which had a significant focus on crypto but was much larger than Silvergate, was taken over by banking regulators. Although cryptocurrency prices experienced a surge following the federal government’s intervention to secure depositors in two of the banks, the events caused instability in the stablecoin market, and the crypto sector was left with few alternatives as traditional banking services continue to cut off their support.

Despite this, the federal government’s intervention on Sunday to guarantee all deposits for Signature and SVB depositors boosted confidence and led to a rally in the cryptocurrency market. Both Bitcoin and Ethereum rose by nearly 15% in the last 24 hours. This development suggests that the government is back to providing liquidity, rather than tightening, and loose monetary policy has historically benefited cryptocurrencies and other speculative assets.

As of Sunday evening, stablecoins, including USDC and DAI, had regained their pegs. However, the closure of Silvergate and Signature, which were considered the two most crypto-friendly banks, could present problems for bitcoin and the cryptocurrency industry in the long run.