By now, you may have heard of the Silicon Valley Bank collapse, the second-largest 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 its capital.
While the repercussions of Silicon Valley Bank’s failure will be felt in the tech industry, crypto markets are already feeling the effects. At the time of this article’s publication, 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 after the crypto exchange crashed FTX.
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So what’s going on?
If you’ve never heard of Silicon Valley Bank before, it was a commercial bank that largely served the tech industry. Tech companies and venture capitalists both bet on the company, which was more willing than other traditional banks to lend money to VC-backed startups that may have been cash-strapped (Read: Many tech startups .).
Silvergate, the largest US crypto bank, has gone into liquidation
“We bank nearly half of all US VC-backed startups, and 44% of US VC-backed technology and healthcare companies that went public in 2022 are SVB customers. “, proudly underlined the bank on its website(Opens in a new tab).
While Silicon Valley Bank has made risky investments, what really seems to have hurt the bank is the pandemic. Or, really, what it did due to the success of the tech sector at the start of the pandemic.
In 2020, amid quarantines and global lockdowns, the tech industry has flourished. People were spending a lot of time working remotely or just in front of their computers. Tech companies continued to hire and a slew of startups received funding. Silicon Valley Bank ended the first quarter of this year with $60 billion in total customer deposits. At the end of the first quarter of 2022, the Silicon Valley bank had a total of around $200 billion in customer deposits.
With all this new money, Silicon Valley Bank decided do something(Opens in a new tab) with that. Thus, the company invested in treasury bills and mortgage-backed securities. Then, in an effort to combat rising inflation in the United States, the Federal Reserve raised interest rates. This ended up hitting Silicon Valley Bank in several areas. On the one hand, the value of those bonds in which he invested fell. The cost of borrowing money due to rising interest rates has caused the tech industry to recalibrate. And to compound the problem, venture capital money began to dwindle as VCs retreated from technology investments. To minimize its losses, Silicon Valley Bank sold some of its assets at a loss of $1.8 billion.
Then, last Wednesday, Silicon Valley Bank announcement(Opens in a new tab) that it needed to raise $2.25 billion in capital. Bank customers panicked at the news. By late Thursday, $42 billion in deposits had been withdrawn from Silicon Valley Bank. The next day, regulators stepped in and closed the bank.
When it comes to cryptocurrency, it’s likely that recent failures within the crypto industry have helped ease the atmosphere that has led to this bank run. Shortly before the fall of Silicon Valley Bank, another bank that largely served the tech sector also failed. On March 8, Silvergate Bank announced that it would close and liquidate its assets. Silvergate was particularly known for being one of the most crypto-friendly banking institutions and had many clients in the cryptocurrency industry.
But crypto companies are also feeling the effects of Silicon Valley Bank. In fact, this is why the USDC is trading well below its $1 peg. Circle, the issuer of the stablecoin, announcement(Opens in a new tab) that he has $3.3 billion in deposits at Silicon Valley Bank. CoinDesk says this represents around 8% of the reserves backing the USDC stablecoin.
As people look to convert their USDC to other stablecoins, these crypto holders are also being hit by fees. Due to the excessive use of the Ethereum network to make these transfers, the gas fees associated with the transactions are way up(Opens in a new tab).
It’s unclear what’s next for Silicon Valley Bank customers at this time. Within the tech industry, there are concerns about whether the various startups the bank has as clients will be able to make the payroll in the coming weeks. It is not known how much money will be recovered for the bank’s customers. According reports(Opens in a new tab), more than 85% of the bank’s deposits were uninsured. FDIC insurance covers up to $250,000 per account. Some VCs such as Gary Tan(Opens in a new tab) and associate of Elon Musk David Sacks(Opens in a new tab) urge the government to step in and help beyond that.
As for Elon Musk himself, he has also inserted himself into the chaos.
When a Twitter user suggested he buy the failing bank and use it to turn Twitter into a digital bank, Musk replied(Opens in a new tab) that he is open to the idea.