What Silicon Valley Bank is and why its failure affects cryptocurrency

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

While the consequences of Silicon Valley Bank’s failure will be felt across the tech industry, the crypto markets are already feeling the effects. As of the publication 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 that the USDC fell much lower than it did even after the collapse of the crypto exchange FTX.

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So what happens?

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 had a bank with the company, which was more willing than other traditional banks to lend money to VC-backed startups that may have lacked cash flow (Read: Many tech startups.).

“We bank almost 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 customers,” the bank proudly highlighted its website(Opens in a new tab).

While Silicon Valley Bank made risky investments, the pandemic is what seems to have really hurt the bank. Or, really, what it did because of the tech sector’s success in the early days of the pandemic.

In 2020, amid worldwide quarantines and shutdowns, the tech industry was booming. People spent a lot of time working remotely or directly in front of the computer. Tech companies continued to hire and a number of startups received funding. Silicon Valley Bank ended the first quarter of that 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 about $200 billion in customer deposits.

With all this new money, Silicon Valley Bank decided to do something(Opens in a new tab) with that. So the company invested in government bonds and mortgage-backed securities. Then, in an attempt to deal with rising inflation in the United States, the Federal Reserve raised interest rates. This ended up affecting Silicon Valley Bank in several areas. First, the value of the bonds it invested in fell. The cost of borrowing money due to higher interest rates caused the tech industry to recalibrate. And to add to the problem, venture capital money began to dwindle as VCs pulled back from technology investments. To minimize losses, Silicon Valley Bank sold some of its assets at a loss of $1.8 billion.

Then, last Wednesday, Silicon Valley Bank 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.

In the case of cryptocurrency, it is likely that the recent failures of 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 technology sector also failed. On March 8, Silvergate Bank announced 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 within the cryptocurrency industry.

But crypto companies are also feeling the effect of Silicon Valley Bank as well. This is actually why the USDC is trading too well below the $1 stick. Circle, the stablecoin issuer, announced(Opens in a new tab) that it has $3.3 billion in deposits in Silicon Valley Bank. CoinDesk says this amounts to around 8 percent of the reserves backing the USDC stablecoin.

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

It’s unclear what’s next for Silicon Valley Bank’s customers right now. Within the tech industry, some are worried about whether the various startups that the bank has as customers will be able to take a salary in the coming weeks. It is unknown how much money will be recovered for the bank’s customers. In accordance 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 employee David Sacks(Opens in a new tab) urges 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 failed bank and use it to turn Twitter into a digital bank, Musk answered(Opens in a new tab) that he is open to the idea.