The largest NFT brands had funds in SVB

On March 10, after days of uncertainty spurred by $1.8 billion in surprise bond losses, Silicon Valley Bank (SVB) collapsed, sending a tidal wave of ripple effects throughout the financial industry. The incident quickly prompted the US Treasury Department, the Federal Reserve and the FDIC to step in to effectively avoid disaster and ensure depositors have access to all their funds, whether they are insured or not.

While the situation is still evolving, the apparent failure has those in traditional finance shuddering at the memory of the financial crisis of 2008. Still, the context of the collapse—that SVB was a significantly popular choice for venture capitalists and tech startups—has encouraged more modern investors (who those in Web3) to note the potential of decentralization to avoid central bank issues.

But still, in the days following the debacle, it has become clear that the NFT space may have actually dodged a bullet even with the help of regulators. Because although Web3 strongly purports to be decentralized, some of the most prominent players apparently narrowly escaped being caught up in the debacle.

What happened

How did the 16th largest bank in the US become the second largest bank failure in US history? To summarize, the collapse came down to two main factors.

The first is that over the past year the Federal Reserve has raised the Federal Funds rate by nearly five percentage points in an effort to tame inflation. These higher interest rates significantly chipped away at the value of long-term bonds that SVB and many other banks took on in the past when interest rates were next to nothing.

The second factor concerns the rapid and broad decline in technology revenues and venture capital in the US. In response to the downturn, startups had chosen to withdraw funds held in SVB, meaning the bank faced significant unrealized losses in bonds at the same time as customer withdrawals escalated. This in turn led to a run on the bank where customers panicked and everyone tried to withdraw their money at once.

Just two days after the SVB closure, the Treasury Department, the Federal Reserve and the FDIC issued a joint statement saying that “depositors will have access to all their money beginning Monday, March 13,” and that no losses related to the resolution of the SVB would come from the taxpayers’ NOK.

The statement also mentioned that regulators took these unusual steps because SVB posed a significant risk to the US economy. As regulators continue to search for a buyer for SVB and uncertainty about what comes next grows, HSBC has acquired SVB UK for a symbolic £1.

Outside of the traditional financial world, those in the blockchain industry are doing their best to understand how the situation may have, and may still, affect their footing.

Who might have been affected?

Not to be confused with the fall of FTX, this latest three-letter acronym fiasco had a significantly less damaging effect on the NFT space than the aforementioned failed crypto exchange. Thanks to the actions of the Federal Reserve and the FDIC, the many accounts under SVB—which included consumer accounts as well as those of high-profile companies like Roblox, Buzzfeed, Etsy, and more—were made whole as of March 13.

But the fact is that the SVB collapse could have done it very significantly impacted the blockchain industry. Because aside from crypto companies like Avalanche, BlockFi, Ripple, Pantera and others who had funds locked up in the SVB debacle, many NFT-adjacent entities would have been in for a world of hurt as well. Here are some examples.

Circle

One of the most immediate and impactful concerns arose from the dissolution of the USDC stablecoin. USDC lost its 1/1 peg to the US dollar just hours after SVB was shut down, and Circle’s $3.3 billion in cash reserves (about eight percent of the funds backing USDC) went into limbo. Although the situation has since been rectified, the USDC has yet to return to the $1 peg as Signature Bank (another institution critical to USDC holdings) was seized in the aftermath of a similar bank run.

Proof

Proof Collective – which has grown in popularity in recent years thanks to the success of projects such as Moonbirds, Oddities and Grails – became an immediate concern for the NFT community in the wake of the SVB news. Addresses the Proof community via Twitter, the project group confirmed that Proof had cash in SVB, although they did not state how much. Furthermore, they noted that they had diversified assets across ETH, stablecoins and fiat.

Azuki

When word first came about SVB, many also looked to the popular PFP project Azuki (led by a former major technology entrepreneur Zagabond) to see if it was affected. Nevertheless, Zagabond quickly dispelled concerns, stating to the project’s thousands of Discord members that SVB was just one of their many banking partners and that the bank held less than five percent of the project funds.

Yuga Labs

Members of the NFT community were also quick to voice concerns about Yuga Labs following SVB’s closure. Still, like Azuki, the brand made it clear that the failure would not affect their business or plan in any way. Yuga founder Greg Solano announced via Discord that the company had “super limited financial exposure” to the situation.

Memeland

Memeland, the Web3 venture studio created by Hong Kong-based meme-centric entertainment website 9GAG, was similarly minimally affected by the SVB collapse. Go to TwitterRay Chan, CEO and co-founder of 9GAG, shared that Memeland only had about $40,000 in the bank, with no plans to retire. He went on to express his lack of concern about the failure as well, stating, “when SVB falls as fast as FTX did, crypto and NFTs don’t look that risky at all.”

What does it all mean for Web3?

It is not easy to say that the implications of the SVB closure could have been significantly worse if regulators had not stepped in to guarantee deposits. Even considering the minimal exposure that most major NFT players had to the bank, Web3 would surely have felt ripples from the Circle situation alone, as USDC is a very popular stablecoin for those in the NFT space.

Still, a few key takeaways have emerged in response to the near-catastrophic experience. The most prominent has everything to do with the already prevalent Web3 ethos: decentralization. This of course goes far beyond advocating decentralization and keeping funds outside the central banking system (as many already do). Because the most important lesson from the SVB fiasco is that to reduce crypto and NFT risk, users should absolutely not keep all their assets in one place.

NFT native users will surely have heard this warning time and time again. Aside from following Web3 security best practices, locking assets for safekeeping or simply spreading assets across multiple secure wallets and accounts can help significantly reduce risk.

So the saying goes: Don’t put all your eggs in one basket.