- Silicon Valley Bank’s collapse and Circle’s USDC stablecoin’s depeg have triggered a fast-spreading contagion in crypto.
- Ethereum is now being considered a security by US financial regulators and this has resulted in widespread FUD among ETH holders and the DeFi ecosystem.
- It remains to be seen whether crypto-friendly and tech-client heavy banks like Silvergate and Silicon Valley Bank get bailed out of their crisis.
US financial regulators’ crackdown on stablecoins, issuers and cryptocurrency exchanges took a new turn in 2023 with lawsuits alleging “Ethereum is a security.” A large part of the DeFi ecosystem relies on Ethereum and stablecoins like Circle’s USDC, therefore it has resulted in widespread FUD and panic in the crypto community.
The voluntary liquidation of crypto-friendly Silvergate bank and Silicon Valley Bank’s collapse have added to the uncertainty. Market participants are keen to know whether the US Federal Reserve will consider bailing out these banks in crisis amidst rising inflationary pressures.
Also read: Where does Vitalik Buterin’s allegiance lie: RAI or Circle’s stablecoin USDC?
What’s the macroeconomic outlook, will regulation crush crypto innovation?
US Federal Reserve Chair Jerome Powell testified at a hearing before the Senate Banking Committee last week, stating that the Fed does not want to stifle innovation. Powell argued that there has been a remarkable set of events in the crypto space, noting there’s been “quite a lot of turmoil” in the past year, with companies collapsing and high-profile fraud being revealed.
Powell was quoted as saying:
We see in crypto activity lots of things that suggest that regulated financial institutions should be quite cautious in doing things in the crypto space.
US financial regulators have repeatedly issued statements and policy interpretations that dampen the sentiment among crypto traders. New York Attorney General Letitia James recently filed a suit against KuCoin exchange, citing Ethereum as a security.
Suit filed by AG Letitia James
The change in the regulators’ stance on cryptocurrencies like Ethereum and stablecoins has caused a rise in uncertainty in the crypto ecosystem.
What happens when Ethereum drops to $350: Citron Research
Ethereum is one of the key components of the DeFi ecosystem. As of November 2022, Ethereum accounts for upwards of 58% of DeFi, based on data from Statista.
Ethereum in DeFi ecosystem
Since a large part of the DeFi ecosystem revolves around Ethereum and its utility as a smart contract blockchain, if Ether is deemed a security it would negatively impact the entire ecosystem.
Citron Research, a stock research firm recently published a tweet stating the case for Ether’s price drop to $350. The firm cited Ether being considered a security since its migration to Proof-of-Stake and its current market capitalization.
Will Silicon Valley Bank get bailed out?
Silicon Valley Bank, considered a tech-friendly financial institution recently witnessed a collapse. The Federal Deposit Insurance Corporation (FDIC) shut down the SVB after its stock crashed nearly 60%.
Danny Fortson, correspondent for The Sunday Times told CNBC that there is market-wide fear with bank stocks crashing. Market participants are awaiting a bailout of the SVB bank. If the FDIC could find a buyer, it could reinstate depositor’s confidence in financial institutions.
Fortson argued that SVB markets itself as a startup-friendly bank with 50% of their clients being startups. SVB therefore exposed itself to a unique risk, with rising interest rates, declining bond rates and clients pulling their funds out.
Since the SVB has less individual clients and more institutions as its customers, it makes for a unique scenario. SVB has less than 40,000 commercial customers. The bank suffered a liquidity crunch and a bailout could help accounts be recovered on a one-to-one basis.
Experts believe SVB’s crisis may not be systemic as of now, leaving room for possible bailout. This could bring relief to market participants and crypto traders alike.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Follow us on Telegram
Stay updated of all the news
Bitcoin whales could prevent BTC price first monthly loss of 2023 through this move
Bitcoin price is inching towards the first monthly loss of 2023. At press time, BTC price is 4.4% below $29,233, its price on May 1. If BTC fails to regain lost ground, the asset is in for its first monthly loss of the year.
Cardano price rallies with surge in DEX volume and new meme coin launch
Cardano-based decentralized exchange Minswap registered a large spike in transaction volume since the beginning of May. Between May 1 and 30, transaction volume surged from $10 million to $72 million.
Shiba Inu eyes recovery as holders pull more than 44 trillion tokens off exchanges
The reserve of Shiba Inu tokens across cryptocurrency exchange platforms has consistently declined between March and May. SHIB holders have pulled 44.53 trillion tokens off exchanges.
XRP likely set for price rally as network activity heats up
XRP Ledger’s native token XRP registered an increase in address activity on Monday, when more than 490,000 addresses interacted on the network, signaling an impending price rally.
Bitcoin: BTC delays inevitable crash to $25,000
Bitcoin price is delaying a crash that has been brewing for roughly two weeks. A failure to push higher could result in a steep correction next week. The troubling macroeconomic conditions could be key in catalyzing and trigger a nosedive for BTC holders.