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What the Silicon Valley Bank Collapse Means to the Crypto Market

March 14th, 2023Rory KeaneRory Keane

Silicon Valley Bank, one of the mainstays of the tech and startup economy in the United States, collapsed seemingly overnight last week. A bank run had depositors rushing to get their funds out of the California-based bank that made a name for itself by propping up emerging companies in the frothy tech and startup sectors. While Silicon Valley Bank (SVB) was formerly flying high in the days of COVID-19- induced stimulus funds, things came to a head in early March.

What happened? Here are three key takeaways from the collapse of SVB and what they mean for the crypto world.

Domino effect?

The SVB implosion was just one entry in a series of unfortunate events to hit the banking sector. There are implications for the crypto industry writ large since it all started Wednesday, March 8, 2023, with one of crypto’s most prolific lenders: Silvergate Bank. Silvergate had a crypto-friendly reputation because they issued loans and lines of credit to crypto companies when legacy financial institutions were less interested in doing business with the decentralized finance (DeFi) sector.

Silvergate’s closure came about voluntarily, and the bank’s executives shuttered its doors while pledging to make depositors whole. The FTX bankruptcy weighed heavily on Silvergate — uncertainty surrounding the crypto sector in a post-FTX world played a hand in Silvergate’s depositors making a run on the bank’s assets. Nonetheless, Silvergate closing down voluntarily means that it escaped the cloud surrounding SVB.

SVB didn’t have the good fortune (if you want to call it that) of voluntarily closing its doors. Instead, the federal government got involved as SVB went into receivership with the Federal Deposit Insurance Corporation (FDIC) to ensure that depositors were able to access funds. But, similarly to Silvergate, a flood of withdrawals rocked the bank.

The moment that the dam burst open for SVB? It very well could have been when they announced that they needed to raise $2.5 billion in capital to remain a going concern on March 8. Not a good sign, in other words. SVB’s realized loss on long-term bonds, which lost value as interest rates were hiked, had more to do with their closure than anything going on in crypto markets, to be clear.

The next domino to fall was New York-based Signature Bank. Like its west coast counterpart Silvergate, Signature Bank made a name for itself by catering to crypto and crypto-adjacent clientele, though it’s important to note that Signature didn’t have nearly as much exposure to the crypto sector as Silvergate. Despite those differences, a rinse-and-repeat of what happened to SVB happened to Signature just days after federal regulators had to backstop SVB: billions were quickly withdrawn, and the business was shut down before the panic could spread any further.

A stablecoin gets shaken

Meanwhile, a relatively stable corner of the crypto community experienced its own fallout from the troubled banking sector in early March. That would be the stablecoin USDC, which has its value pegged to the U.S. Dollar. In the hours in between SVB going into receivership and Signature Bank getting shut down, USDC briefly lost its peg to the dollar.

Why did USDC stumble, then? Did the U.S. Dollar tank in tandem with its tokenized version? Not quite. USDC is issued by peer-to-peer payments fintech firm Circle, and when word got out that Circle had cash reserves in SVB, that’s when the proverbial S#*† hit the fan. Investors hastily dumped more than $2 billion in USDC holdings in a 24-hour span according to blockchain data analysis firm Nansen. Circle was quick to clarify that only about 25 percent of its reserves were held at SVB and that the rest of its reserves were spread over six different banks. USDC rebounded to its $1 price in relatively short order.

DeFi has its day

Now, with the largest bank closures on record since the global financial crisis of 2008-09, the attitude is very … interesting. Sure, the guardrails put in place following the financial meltdown that triggered the birth of bitcoin appeared to have worked this time around: federal regulators are saying that depositors will get their money back.

One (not so tiny) wrinkle in that assurance is that FDIC only protects deposits up to $250,000. However, given that the public was facing the second-largest bank closure in history, extraordinary measures were taken by federal regulators to pay all depositors back. Everything that companies or individuals held in the now-shuttered banks above that FDIC threshold will be paid back according to regulators – but no one can say with certainty when that will happen.

If this sounds like a familiar tune, it may ring true to crypto investors who experienced the bankruptcy of digital asset lenders like Voyager, Celsius, or Genesis. Of course, the FTX bankruptcy is the 800-pound gorilla in the room. It will take years to sort out which creditors get their money back from that massive implosion on the crypto side of the financial divide.

But many proponents of DeFi are taking the news about the banking system’s hiccups in stride. Why? Because they know that things like smart contracts and liquidity pools can act as built-in guardrails so a rapid run on assets can’t happen to blockchain networks. On top of that technical innovation, crypto holders who have custody of their own digital assets with self-custodial wallets know where their holdings are at all times.

Closing time

So, in summation, is there a potential silver(gate) lining to the recent banking woes? Yes. If investors are nervous about opaque accounting systems or a herd mentality among bank depositors, then the solution could lie with transparent, public ledgers. This is why the blockchain was invented.

Oh, and one last note, since the whole silver-lining trope was mentioned. Investors are once again looking for that bulletproof asset class to ride out dramatic events like these bank failures. Gold is one proposed outlet, but let’s keep in mind that BTC and ETH outperformed gold prices in the previous decade. While banks like SVB were pumping up the tech sector, gold was ticking along fine — but blockchain besties like BTC and ETH were blossoming.

Looking to bolster your crypto portfolio? Find your nearest crypto ATM. Reminder: all crypto transactions are final and irreversible. None of this content should be construed as financial advice. Safeguard your personal information while buying, selling, or swapping digital assets. Be well.

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