Crypto feared being isolated from traditional finance. The banking crisis fuels these concerns.

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If banks are told they can’t bank the industry, then how does the industry create diversification and banking? said Dante Disparte, chief strategy officer at stablecoin issuer Circle. The risk, unfortunately, was that too few banks had too large a sector.

Last week’s banking turmoil is the latest setback for a crypto industry that has seen much of its value wiped out after the collapse of one of the biggest crypto exchanges, FTX, and the indictment of its founder, Sam Bankman-Fried.

In recent years, Silvergate and Signature, in particular, have become integral parts of the digital asset ecosystem by offering both traditional banking services and fast payment networks. SVB had less exposure to the industry.

Now, with the banks closed, executives have been sent on a frantic race to find new banking partners, with some experts also speculating that regulators are trying to force them out of business.

It’s hard to watch this and not see a coordinated effort to stifle the industry, said Ryan Selkis, CEO of crypto research firm Messari.

Still, not everyone is convinced that the banking crisis is strongly tied to lenders’ ties to crypto. Ultimately, the cause was likely a combination of poor risk management and macroeconomic issues, said Mark Williams, a former Federal Reserve examiner who teaches at Boston University. Notably, the Fed’s aggressive fight against inflation left some lenders struggling with falling deposits and heavily discounted bonds they could only sell at a loss.

When you lose depositor confidence, Williams said, even the strongest bank can’t get up.

A spokesperson for the New York Department of Financial Services, which shut down Signature on Sunday, said the decision had nothing to do with crypto, adding that the bank also deals with everything from food vendors to commercial real estate.

The bank failed to provide reliable and consistent data, creating a significant crisis of confidence in bank management, the spokesperson, who spoke on condition of anonymity to speak about a department decision, said in a communicated. The decision to take possession of the bank and turn it over to the FDIC was based on the bank’s current status and its ability to conduct business in a safe and sound manner on Monday.

The remark from New York regulators came after former representative Barney Frank, a member of the board of directors of Signature, told POLITICO on Monday that the bank run was caused by the nervousness and beyond the nervousness of [Silicon Valley Bank] and crypto.

I think if it weren’t for FTX and the extreme nervousness about crypto this wouldn’t even have happened to [Silicon Valley Bank] or us, said the Massachusetts Democrat who was a key architect of the new rules enacted in the aftermath of the 2008 crisis. And it was not something that could have been anticipated by regulators.

Regulators, nonetheless, are watching for any spillover from the banking sector’s woes to crypto.

Commodity Futures Trading Commission Chairman Rostin Behnam said on Wednesday he was comfortable moving through this without disrupting our markets after the response from banking regulators over the weekend.

But the CFTC is making sure the crypto derivatives markets it oversees remain resilient [and] free from fraud. Given the close ties Silvergate and Signature have with the industry, Behnam told reporters at an industry conference in Florida that there was a chance the crypto market could run into liquidity issues and access to traditional finance.

So far, the immediate impact has been relatively muted among some of the biggest crypto players.

Coinbase, the nation’s top crypto exchange by market volume, has $240 million in corporate funds locked in Signature, according to the company. But no customer funds were affected, Coinbase said in a tweet.

Kraken ends its relationship with Silvergate. Both companies said they use a number of different banks for customer funds.

The circling dollar-pegged USDC token, however, was rattled by traders over the weekend.

The so-called unanchoring came after the company revealed it had deposited more than $3 billion with Silicon Valley Bank. While this was only a fraction of the circles’ reserves most of which are held in a money market fund run by BlackRock, news of its exposure sent the token’s price plummeting below its $1 peg. The token has since rebounded much to the relief of crypto executives and backers.

The ball-breaking USDC has injected uncertainty into crypto markets that view the token as a stable asset and an essential part of ecosystem payment infrastructure.

The volatility had more to do with Silicon Valley Bank than Circle, Disparte said. The banks’ investment portfolio was torpedoed when the Fed began raising rates to bring inflation down. The exposure of the circles to the institution posed a major threat to its token.

Disparte said he hopes pro-crypto lawmakers can leverage the calamity around the collapse of the three banks to pass stablecoin legislation, which has been in the works at House Financial Services for nearly a year. .

Sam Sutton, Zachary Warmbrodt and Victoria Guida contributed to this report.

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