An odd benefit of the Silvergate fallout is the outlook for stablecoins has just gotten rosier

Published Wed, Mar 15 20234:11 PM EDT

Stablecoins have been touted as one of the biggest beneficiaries of the end of Silvergate and Signature . The two banks, the most crypto friendly and forward-thinking among the U.S. public banking institutions, not only provided business bank accounts, they had payment rails – namely, the Silvergate Exchange Network and the Signet platform – that allowed customers' money to flow into crypto assets. Monday, the day after New York State regulators shut down Signature, liquidity at U.S. exchanges had already suffered. Gemini's was down 74% for the month, while liquidity at Coinbase dropped 50% and Binance.US saw a 29% decline, according to cryptocurrency analytics firm Kaiko. Binance's main global exchange, by contrast, suffered a smaller impact, falling 13%. Stablecoins offer another "on-ramp" into the world of crypto assets and their existence was a source of comfort after the fall of Silvergate, when some speculated that Signature might be the next to go down. But over the weekend, USDC's peg from the dollar broke, falling as low as 86 cents and leaving some wondering how "stable" these crypto assets really are. "Stablecoins will likely become even more ubiquitous among traders," Kaiko said in a recent report. "Rather than deposit your dollars with an exchange, you deposit them with a stablecoin issuer, receive stablecoins, and then transfer those to an exchange. The problem is, though, that stablecoin issuers still need access to a crypto bank, so the risk is now further concentrated." Although banking relationships may be hard to come by for a few months yet for crypto companies, and regulatory uncertainty around cryptocurrencies remains, the current state of the markets could mean clearer regulation around stablecoins soon. Kristin Smith, executive director of the Blockchain Association, said she can see specific legislation being introduced this year, although whether it goes all the way to the president's desk is an open question. "Compared to other issues in the crypto space, stablecoin regulation has been the subject of more congressional hearings and joint regulators' studies than any other crypto issue," Smith said. "Stablecoin policy is ripe for action." In December, crypto industry ally and then-U.S. senator, Pat Toomey, introduced the Stablecoin Trust Act . The legislation — the Pennsylvania Republican's second effort that year — would have required stablecoins to be fully backed by reserves. "Some of the bills that are being considered would give consumers confidence in using these stablecoins because they would have transparency over what the reserves look like," she said. That's managed "on a voluntary basis today, but this would make it more uniform and would also provide guidance as to where and how those reserves can be stored." "This should be the issue that moves first," Smith said. "The political calculus is right, it's bipartisan, the appropriate amount of debate and discussion and diligence has been done." De-risked from the banking system Some stablecoins may offer an on-ramp into crypto, but they won't take the place of bank accounts . USDC lost its peg last weekend when its issuer, Circle, revealed it held $3.3 billion of reserves in now-failed Silicon Valley Bank, triggering panic that the asset was no longer fully backed. By Monday, when banking hours resumed, USDC had regained its $1 peg. "The problem that we had with the depegging of stablecoins last weekend didn't have anything to do with the crypto networks that they transfer on top of," said Smith. "The issue came with the limitation of the banking hours, when there was demand to issue or redeem new stablecoins that was dependent on having a banking network," she added. "With the SEN and Signet down, it makes it more difficult to do that. There is still the need to have those reserves stored in a 'real-world' financial institution." As of Monday, Circle said it had about $9.7 billion in cash, including $5.4 billion that is held with BNY Mellon . Another $1 billion of the USDC reserves is held with Customers Bank . Some in crypto have been pointing out that although Silvergate and Signature were the biggest crypto banks, they weren't the only ones. Still, given the hostile stance by regulators toward crypto, small banks may be discouraged in the coming months from doing business with crypto companies, especially if the current turmoil in the financial sector lingers. As for larger banks, some may only be willing to take on such risk in well-established companies. Coinbase and Gemini are both customers of JPMorgan Chase , for example. "I would like to see a network come up on the banking side that allows for a faster, more readily available way for the portion of the stablecoin ecosystem that does touch banks, so that if there's a long weekend, you can still have the issuance or the redemption of stablecoins when banks are closed," Smith said.