What the Failures of Signature, SVB and Silvergate Mean for the Crypto Sector

13 Mar 2023

Two of the banks that were friendliest to the crypto sector and the biggest bank for tech startups all failed in less than a week. While cryptocurrency prices rallied Sunday night after the federal government stepped in to provide a backstop for depositors in two of the banks, the events sparked instability in the stablecoin market.

CNBC report explains that  Signature and Silvergate were the two main banks for crypto companies, and nearly half of all U.S. venture-backed startups kept cash with Silicon Valley Bank, including crypto-friendly venture capital funds and some digital asset firms.

The federal government stepped in on Sunday to guarantee all deposits for SVB and Signature depositors, adding confidence and sparking a small rally in the crypto markets. Both bitcoin and ether are nearly 10% higher in the last 24 hours.

According to Nic Carter of Castle Island Ventures, the government’s willingness to backstop both banks signifies that it’s back in the mode of providing liquidity, rather than tightening, and loose monetary policy has historically proven to be a boon for cryptocurrencies and other speculative asset classes.

But the instability once again showed the vulnerability of stablecoins, a subset of the crypto ecosystem investors can typically rely on to maintain a set price. Stablecoins are supposed to be pegged to the value of a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold. But unusual financial conditions can cause them to drop below their pegged value.

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