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The stunning bank failures of recent days, all of them involving institutions with wide exposure to cryptocurrency, are likely to have a deep impact not only on blockchain products but on payments more broadly, experts say.
A stronger case for a digital dollar, stricter regulation of digital currencies in general, and less generous funding for payments startups involved in digital currency are among the likely fallout from the failures of Signature Bank and Silicon Valley Bank over the weekend and of Silvergate Capital Corp. last week.
All three institutions were hospitable lenders and facilitators to crypto firms, and their collapse within days of each other sent shock waves that are still rattling the payments industry. Circle Internet Financial, a customer of SVB, saw its stablecoin depeg from the U.S. dollar over the weekend because of the company’s $3.3-billion in cash reserves held at the bank to back the coin. But the stunning events may also stir some much-needed action in the crypto industry, some experts say.
“I see some opportunities,” says Aaron McPherson, principal at AFM Consulting Partners and a long-time observer of the crypto industry. Among these, he says, is a greater likelihood that the federal government will move forward with a digital currency backed by the Federal Reserve. The notion took on some momentum last year with an executive order from President Biden aimed at laying the groundwork for crypto regulation, but has not seen much action since. “The idea may have just been given a jolt,” McPherson argues. “The big weakness with private coins is the [backers] have to put their money somewhere in a bank. You could have run that depegs it.”
Other observers agree with McPherson. “There will always be a lot of good arguments for a U.S.-backed stablecoin,” says Cliff Gray, who follows cryptocurrency at The Strawhecker Group, an Omaha, Neb.-based consultancy. “Maybe the message will get through now to the general public.”
But there are potentially dire consequences for crypto. Whether a government-backed digital dollar gains momentum, the events of the weekend “will force banks to shy away from even considering blockchain technology, which is too bad,” fears Gray. Indeed, he predicts that “it’s going to be a lot tougher for tech startups to get funding now, absolutely if they’re involved in crypto.”
For some, rule-setting from Congress will be crucial in the wake of the bank failures, which “illustrate a need for more proactive regulation and legislation,” says McPherson. In a matter of days, he adds, “We now have a year’s worth of disasters to spur legislation.”
To those who fear new rules of the road, McPherson counsels patience. “It’s an opportunity [for holders of cryptocurrency],” he says. “These people have gone through a heart-stopping weekend. They may be open to more reasonable proposals, and not go back to business as usual.”
As for banks, he adds, “there needs to be oversight. Banks can’t keep going on as if nothing has changed.” But whatever the new legislation turns out to be—if Congress acts—it will have to be suited to a new form of currency, he argues, adding, “Old laws to govern a new situation isn’t the way to go.”
