Institutional Crypto trading witnessed a significant decline following a series of high-profile U.S. bank failures in March, according to a report from the blockchain intelligence platform Chainalysis. The report, focusing on North American crypto activity, highlights a substantial drop in “institutional” transaction volume, defined as transactions exceeding $10 million, beginning in April 2023. In contrast, smaller-scale “professional” and “retail” trading activities remained relatively constant.

Chainalysis report blames SVB and Silvergate issues

The authors of the report noted, “Crypto activity contracted more in the months immediately following the March banking crisis that saw Silicon Valley Bank and crypto-friendly banks Signature and Silvergate close down.” This decline added to the ongoing trend of reduced trading activity since the failures of several crypto exchanges and lending desks, notably FTX and Alameda Research in November of the previous year. A few months later, Silvergate faced pressure to wind down its operations due to its suspicious ties to a massive alleged fraud involving both firms.

This put Silvergate in the regulatory spotlight, leading to its closure. Shortly after, Silicon Valley Bank (SVB) faced a similar fate due to a run on deposits after the realization of a multi-billion dollar loss in its underwater bond portfolio. Signature Bank also went into receivership as panic spread to other banks. While these three banks fell for different reasons, the consequences were similar: crypto businesses faced challenges in accessing U.S. dollar liquidity, forcing many to seek banking support offshore. Notably, the stablecoin market was also impacted by the banking crisis.

The impact of the incident on the crypto industry

Stablecoins, a type of cryptocurrency pegged to traditional currencies, particularly the U.S. dollar, lost their dominant presence in North America beginning in February. Between February and June, the region’s share of crypto volume occupied by stablecoins dropped from 70.3% to 48.8%. Chainalysis noted that since the spring of 2023, the majority of stablecoin inflows to the 50 largest crypto services have shifted from US services to non-US services. The crisis in the banking sector disrupted the stablecoin landscape and led to a temporary loss of peg for Circle USD (USDC), the second-largest stablecoin.

This event prompted many investors to shift towards Tether USD (USDT), which has since accumulated a market capitalization exceeding $82 billion. The fallout from the high-profile bank failures in March had a significant impact on institutional crypto trading in North America. A decline in institutional transaction volume was observed, while professional and retail trading activities remained relatively stable. The interconnected challenges faced by the crypto industry, from the failure of crypto-friendly banks to the migration of stablecoin activity to non-U.S. services, highlight the complex dynamics at play in the crypto market. This underscores the need for robust regulatory measures and the development of resilient infrastructure to support the evolving crypto ecosystem.