What is Silicon Valley Bank and why its failure affects cryptocurrencies

By now, you may have heard about the collapse of Silicon Valley Bank, the second-largest bank failure in U.S. history and the largest since the financial crisis of 2008. On Friday, regulators stepped in to take over the bank after a bank that depleted the company’s funds.

While the fallout from Silicon Valley Bank’s failure will be felt across the tech industry, cryptocurrency markets are already feeling the effects. As of the publication of this article, USDC, the second largest stablecoin, has lost the $1 peg and has yet to recover. At one point it dropped as low as $0.89. As CoinDesk(Opens in a new tab) points out that USDC fell much lower than even after the crypto market crash 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 technology industry. Both tech companies and venture capital have partnered with the firm, which has been more willing than other traditional banks to lend money to VC-backed startups that may be short on cash flow (Read: Many tech startups.) .


Leading US crypto bank Silvergate has gone into liquidation

“We bank nearly half of US startups, and 44% of venture-backed US tech and healthcare companies going public in 2022 are SVB clients,” the bank proudly pointed out. Website(Opens in a new tab).

While Silicon Valley Bank made risky investments, what really seems to have hurt the bank was the pandemic. Or, really, what it did because of the success of the technology sector during the early days of the pandemic.

In 2020, amid global quarantines and lockdowns, the tech industry flourished. People spent a lot of time working remotely or right in front of their computer. Tech companies continued to hire and a number of startups received funding. Silicon Valley Bank closed the first quarter of that year with $60 billion in total customer deposits. By the end of the first quarter of 2022, the Silicon Valley bank had a total of about $200 billion in customer deposits.

With all this new money Silicon Valley Bank decided to do something(Opens in a new tab) With this. Thus, the company invested in government bonds and mortgage-backed securities. Then, in an effort to deal with rising inflation in the US, the Federal Reserve raised interest rates. This ended up hitting Silicon Valley Bank on several fronts. First, the value of the bonds he invested in fell. The cost of borrowing money due to higher interest rates has caused the tech industry to recalibrate. And adding to the problem, venture capital money began to dwindle as VCs pulled out of tech 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 was announced(Opens in a new tab) that it needed to raise $2.25 billion in capital. The bank’s customers panicked at the news. By the end of Thursday, $42 billion in deposits had been withdrawn from Silicon Valley Bank. The next day, regulators stepped in and closed the bank.

As for cryptocurrencies, it is possible that recent failures in the cryptocurrency industry helped facilitate the atmosphere that led to this bank run. Shortly before Silicon Valley Bank went down, another bank that heavily catered to the tech sector also failed. On March 8, Silvergate Bank announced that it would close and liquidate its assets. Silvergate was particularly known as 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 USDC is trading well below the $1 peg. Circle, the stablecoin issuer, was announced(Opens in a new tab) that he has $3.3 billion in deposits at Silicon Valley Bank. CoinDesk says this equates to about 8% of the reserves backing the USDC stablecoin.

As people try to convert their USDC into other stablecoins, these cryptocurrency holders are taking a hit in fees as well. Due to the excessive use of the Ethereum network to complete these transfers, the gas fees associated with the transactions are too high(Opens in a new tab).

It’s unclear what’s next for Silicon Valley Bank customers at this time. In the tech industry, some are worried about whether the bank’s various startup clients will be able to make payroll in the coming weeks. It is unknown how much money will be recovered for the bank’s customers. According References(Opens in a new tab), more than 85 percent of the bank’s deposits were uninsured. FDIC insurance covers up to $250,000 per account. Some VCs like e.g Gary Tan(Opens in a new tab) and partner of Elon Musk David Sachs(Opens in a new tab) they are calling on the government to step in and help beyond that.

As for Elon Musk himself, he too has entered the fray.

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

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