The collapse of Silicon Valley Bank and the departure (depeg) of Circle’s USDC stablecoin from its stablecoin triggered a rapidly spreading “contagion effect” in crypto. Ethereum is now considered a security by some US financial regulators, causing widespread panic among ETH holders and the DeFi ecosystem. On the other hand, it is not yet clear whether crypto-friendly and tech-focused banks such as Silvergate and Silicon Valley Bank (SVB) will be rescued from their crisis. How long will this crisis continue?
Recent crises affecting cryptos: USDC, SVB, Silvergate…
Pressure from US financial regulators on stablecoins, stablecoin issuers and cryptocurrency exchanges took a new turn in 2023 with lawsuits filed alleging “Ethereum is a security”. Much of the DeFi ecosystem relies on Ethereum and stablecoins like USDC, so recent developments have caused widespread FUD (fear, uncertainty, and suspicion) and panic in the crypto community. The voluntary liquidation of the crypto-friendly Silvergate bank and the collapse of Silicon Valley Bank have added to the uncertainty. Market participants are wondering if the US Fed will consider bailing out banks in this crisis amid growing inflationary pressures.
Federal Reserve Chairman Jerome Powell testified at a hearing before the Senate Banking Committee last week that the Fed did not want to suppress innovation. Powell argued that there has been a notable set of events in the crypto space, noting that there has been “quite a lot of turmoil” with the collapse of companies and the emergence of FTX events. Powell’s words drew attention
We see a lot of things in crypto activity that suggest that regulated financial institutions should be very careful when doing something in the crypto space.
Concern grows for Ethereum
U.S. financial regulators have repeatedly issued statements and policy comments that dampen sentiment among crypto traders. New York Attorney General Letitia James recently sued the KuCoin exchange, citing Ethereum as a security. The change in regulators’ stance on cryptocurrencies such as Ethereum and stablecoins has led to increased uncertainty in the crypto ecosystem. Ethereum is one of the core components of the DeFi ecosystem. As of November 2022, Ethereum accounts for more than 58 percent of DeFi, according to data from Statista.
Since much of the DeFi ecosystem revolves around Ethereum and its utility as a smart contract blockchain, if Ethereum is considered a security, it could negatively impact the entire ecosystem. Citron Research, a stock research firm, recently posted a tweet stating that they expect the price of ETH to drop to $350. The firm stated that ETH has been considered a security since its transition to Proof-of-Stake and its current market value.
Will Silicon Valley Bank be saved?
Considered a tech-friendly financial institution, Silicon Valley Bank recently witnessed a crash. As we reported on Kriptokoin.com, the Federal Deposit Insurance Corporation (FDIC) closed down the SVB after its shares dropped nearly 60 percent. The Sunday Times reporter Danny Fortson told CNBC that there was market-wide fear as bank stocks fell.
Market participants are waiting for the rescue of the SVB bank. If the FDIC can find a buyer, it can restore depositor confidence in financial institutions. Fortson argued that SVB markets itself as a venture-friendly bank with 50 percent of its clients being startups. Therefore, the SVB exposed itself to unique risk, with rising interest rates, falling bond rates and withdrawing funds from clients.
A unique scenario emerges as SVB has fewer individual customers and more corporate customers. SVB has less than 40,000 commercial customers. The bank has been hit with a liquidity crunch and a bailout can help recover accounts one-on-one. Experts believe that the crisis of the SVB may not be systemic for the time being, leaving room for a possible rescue package. This can bring relief to both market participants and crypto traders.
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