Monday, 15 April 2024

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Crypto industry may escape lasting damage from Silvergate liquidation

Crypto industry may escape lasting damage from Silvergate liquidation

Banks are the lifeblood of a nation’s economic system, and any bank collapse is disturbing. Last week saw two failures. On March 8, Silvergate Capital — the cryptocurrency-focused banking company — entered into voluntary liquidation. On March 10, United States regulators shut down and seized the deposits of tech-oriented Silicon Valley Bank in what was being called the second-largest bank failure in U.S. history. Both California institutions were victims of bank deposit runs. 

The fallout from the collapse of Silicon Valley Bank (SVB) could be significant, though it’s too early to tell. Stablecoins like USD Coin (USDC) and Dai (DAI) losing their dollar pegs is never a good sign, but they were recovering by Sunday, March 12. However, it’s unlikely that the Silvergate Bank debacle will cause long-term harm to the crypto sector.

The fall of the San Diego-based Federal Reserve-member bank should be a minor event compared with the earthquake unleashed by FTX’s November 2022 bankruptcy, sources told Cointelegraph. FTX’s implosion damaged scores of crypto firms, including Silvergate Bank. By comparison, the fallout from the bank’s liquidation should be more contained. It might even provide some valuable lessons about diversification — a fundamental principle of risk management that seems to be forgotten when markets soar.

There will likely be short-term consequences that will likely make life more difficult and costly for crypto firms to find banking services in the United States. And it’s not just the U.S. that is seeing some turmoil.

In Latin America, which is primarily a crypto foreign exchange (FX) market where many firms buy stablecoins like USDC and Tether (USDT) as a means of sending funds abroad, “the Silvergate fallout was problematic,” Thiago César, the CEO of fiat on-ramp provider Transfero Group, told Cointelegraph.

“Most crypto exchanges lost their U.S. dollar rails.[…] It impacted the alternative FX market in LATAM fueled by crypto.” Local Brazilian dealers in USDT and USDC suddenly couldn’t replenish their inventories, César reported. (This interview was conducted before the SVB seizure, which rattled some stablecoin firms further.)

Josh Olszewicz, head of research at Valkyrie Digital Asset Management, told Cointelegraph: “The lack of on and off-ramps as well as general banking needs of consumers and businesses interacting with the crypto industry may be hampered in the near term.” Coinbase, Paxos,…

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