What is Silicon Valley Bank and why its failure is affecting cryptocurrency

By now, you may have heard about the collapse of Silicon Valley Bank, the second biggest bank failure in U.S. history and the largest since the 2008 financial crisis. On Friday, regulators stepped in to take over the bank following a bank run that drained the company of capital.

While the repercussions of Silicon Valley Bank’s failure will be felt across the tech industry, the crypto markets are already feeling the effects. As of the publishing of this article, USDC, the second largest stablecoin, has lost its $1 peg and has yet to recover. It fell as low as $0.89 at one point. As CoinDesk(Opens in a new tab) points out, USDC fell much lower than it did even following the collapse of the crypto exchange FTX.

So, what’s going on?

If you haven’t heard of Silicon Valley Bank before, it was a commercial bank that largely served the tech industry. Tech companies and venture capital both banked with the company, which was more willing than other traditional banks to lend money to VC-backed startups that may have been lacking in cash flow (Read: Many tech startups.).

“We bank nearly half of all US venture-backed startups, and 44% of the US venture-backed technology and healthcare companies that went public in 2022 are SVB clients,” the bank proudly highlighted on its website(Opens in a new tab).

While Silicon Valley Bank made risky investments, what really appears to have harmed the bank was the pandemic. Or, really, what it did due to the tech sector’s success during the early days of the pandemic.

In 2020, amidst the worldwide quarantines and lockdowns, the tech industry flourished. People were spending a lot of time working remotely or just in front of their computer. Tech companies went on hiring sprees and a slew of startups received funding. Silicon Valley Bank ended the first quarter of that year with $60 billion in customers’ total deposits. By the end of the first quarter in 2022, Silicon Valley bank had a total of around $200 billion in customer deposits.

With all this new money, Silicon Valley Bank decided to do something(Opens in a new tab) with it. So, the company invested in treasury bonds and mortgage-backed securities. Then, in an effort to tackle rising inflation in the U.S., the Federal Reserve raised interest rates. This ended up hitting Silicon Valley Bank in multiple areas. For one, the value of those bonds it invested in fell. The cost of borrowing money due to higher interest rates caused the tech industry to recalibrate. And adding further to the problem, venture capital money started to dwindle as VCs pulled back from tech investments. To minimize its losses, Silicon Valley Bank sold off some of its assets at a loss of $1.8 billion. 

Then, this past Wednesday, Silicon Valley Bank announced(Opens in a new tab) that it needed to raise $2.25 billion in capital. The bank’s clients panicked on the news. By the end of Thursday, $42 billion in deposits were withdrawn from Silicon Valley Bank. The following day, regulators stepped in and shut down the bank.

As for cryptocurrency, it’s likely the recent failures within the crypto industry helped facilitate the atmosphere that led to this bank run. Shortly before Silicon Valley Bank fell, another bank that largely served the tech sector also failed. On March 8, Silvergate Bank announced it would close and liquidate its assets. Silvergate was especially known for being one of the most crypto-friendly banking institutions and had many clients within the cryptocurrency industry.

But crypto companies are also feeling the effects of Silicon Valley Bank too. In fact, that’s why USDC is trading for well below its $1 peg. Circle, the issuer of the stablecoin, announced(Opens in a new tab) that it has $3.3 billion in deposits at Silicon Valley Bank. CoinDesk says that this amounts to around 8 percent of the reserves backing the USDC stablecoin.

As people look to convert their USDC into other stablecoins, these crypto holders are taking a hit as well in fees. Due to the excess use of the Ethereum network to complete these transfers, the gas fees associated with the transactions are way up(Opens in a new tab).

It’s unclear what comes next for Silicon Valley Bank’s customers right now. Within the tech industry, some are concerned about whether the various startups that the bank has as its clients will be able to make payroll in the coming weeks. It’s unknown just how much money will be recovered for the bank’s customers. According to reports(Opens in a new tab), more than 85 percent of the bank’s deposits were not insured. FDIC insurance covers up to $250,000 per account. Some VCs such as Gary Tan(Opens in a new tab) and Elon Musk associate David Sacks(Opens in a new tab) are urging the government to step in and help beyond that.

As for Elon Musk himself, he’s also inserted himself into the chaos. 

When one Twitter user suggested he buy the failed bank and use it to turn Twitter into a digital bank, Musk replied(Opens in a new tab) that he’s open to the idea.

Source link: https://mashable.com/article/silicon-valley-bank-failure-startups-cryptocurrency




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