Silicon Valley Bank Shuts Down Putting Crypto Industry At The Crossroad
As major crypto firms are crawling their way out of the collapse of Silvergate Bank, another banking giant leveraged by the industry has fallen. Silicon Valley Bank (SVB), the 16th largest bank in the United States and the bank of choice for more than half of the country’s venture capital-backed tech startups, was shut down by regulators after suffering a bank run following reported losses of $1.8 billion.
The collapse of the banking institution at the heart of the U.S. startup industry marks the second-largest bank failure since Washington Mutual during the 2008 financial crisis.
Silicon Valley Bank Placed Under U.S Government Control After Shut Down
On Friday, March 10, the California Department of Financial Protection and Innovation (DFPI) closed the bank after it announced a loss of approximately $1.8 billion from a sale of investments, including U.S. Treasuries and mortgage-backed securities. Two days earlier, SVB’s holding company attempted to raise a $2.2 billion capital but failed despite the bank being in “sound financial condition” before March 9, 2023.
The bank, which had assets worth approximately $209 billion under management and about $175.4 billion in total deposits as of December 31, 2022, suffered a bank run after panicked customers and investors initiated withdrawals of $42 billion, draining the bank of a quarter of its capital in a matter of hours.
The liquidity drain resulted in SVB shutting down operations with a negative cash balance of approximately $958 million. The bank tried to transfer collateral from various sources but failed after regulators deemed it was incapable of paying off debts.
The DFPI, who declared SVB insolvent, took possession of its assets and businesses and placed the Santa Clara, California-based bank under the receivership of the Federal Deposit Insurance Corporation (FDIC) to liquidate its assets and pay off depositors and creditors. The FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and immediately transferred all Silicon Valley Bank’s insured deposits, ensuring the bank’s customers continue to have access to their insured funds.
The federal regulator, which has insured accounts with deposits of $250,000, announced that it will give insured depositors full access to their funds on Monday, March 13, 2023. The FDIC also promised to pay an advanced dividend to uninsured depositors within the next week, who will get a receivership certificate for the remaining amount that will be paid in future dividend payments once the FDIC sells the bank’s assets.
However, the $250,000 insured limit only accounts for between 3% and 7% of Silicon Valley Bank’s total deposits. Meaning over 90% of deposits in the bank is uninsured, putting more financial scrutiny on depositors that include some prominent names in the crypto industry like Circle, Avalanche, and BlockFi.
Crypto Industry Faces The Wrath Of Silicon Valley Bank’s Collapse
Stablecoin giant Circle Internet Financial Ltd. said Silicon Valley Bank was one of six banking partners it uses to manage 25% of its $40 billion USDC reserves held in cash. The crypto firm confirmed that approximately $3.3 billion of its cash reserves are deposited in the troubled bank. USDC, a stable asset supposed to maintain parity with the dollar at all times, debugged on Friday afternoon and was trading below $0.90.
Crypto exchange Coinbase and brokerage platform Robinhood have temporarily suspended all trades in USDC, the world’s second-largest stablecoin by market cap and one of the most traded cryptocurrencies.
In its latest bankruptcy filing, failed crypto lender BlockFi declared that it has $227 million in uninsured funds in SVB. However, the amount deposited in a money market mutual fund (MMF) offered by the bank and not insured by the FDIC, may well be a violation of U.S. bankruptcy law. BlockFi, which faced a liquidity crisis last June, halted withdrawals and filed for Chapter 11 bankruptcy after the insolvency of its backed FTX in November.
Avalanche Foundation, the group that supports the development of the Avalanche blockchain, confirmed it has an exposure of a “little over” $1.6 million to Silicon Valley Bank. The project’s AVAX token is trading at $14.67 – up by 1.4% in the last 24 hours.
Nova Labs, the company behind decentralized internet and mobile network provider Helium (HNT), said it has an undisclosed amount stuck in SVB. The majority of the company’s reserves are held in other institutions. HNT is currently trading at $2.03 – down by 0.8%.
Non-fungible token (NFT) creators Yuga Labs and Proof were also invested in the collapsed bank. Greg Solano, the co-founder of Yuga Labs, the studio behind the famous blue-chip NFT collection Bored Ape Yacht Club, said his company has “super limited exposure” to the bank which would not impact its businesses. Proof, the creators of Moonbirds, issued a statement saying the company does hold an unspecified amount of cash at SVB and promised the exposure won’t affect the project’s operations or the security of customers’ digital assets.
What Led To The Collapse?
Silicon Valley Bank saw a massive influx in customer deposits in 2021, jumping from $61.76 billion in 2019 to $189.20 billion by the end of the year. Taking advantage of the Federal Reserve’s low interest rates, the bank invested over $80 billion of these deposits in mortgage-backed securities (MBS) to generate a yield on its held-to-maturity (HTM) portfolio. 97% of these MBS’ had a maturity period of over 10 years with a weighted average yield of 1.56%.
However, things started to go south for SVB after the Fed raised borrowing rates on the dollar in 2022 and continued to do so in 2023, resulting in the value of the bank’s MBS falling off the cliff. This was mainly due to investors now being able to purchase long-duration “risk-free” bonds directly from the central bank at a yield that was 2.5x higher.
However, this would not have been an issue for the bank if it was able to maintain customer deposits, as the securities would eventually pay out more than their cost. However, on Friday SVB announced that in an effort to raise capital, it had sold $21 billion worth of its available-for-sale securities (AFS) at a $1.8 billion loss and was looking to raise another $2.2 billion in equity and debt, which failed to materialize. Customers and investors who were under the impression that the bank had enough liquidity to handle operations were surprised by the decision to sell off its AFS portfolio.
The bank’s collapse will have huge ramifications for the crypto and tech industry.
Gary Tan, CEO of American tech start-up accelerator Y Combinator, wrote on Twitter that 30% of companies backed by Silicon Valley Bank won’t be able to pay salaries to their employees in the next 30 days. Gary called it “an extinction-level event for startups” that will push back startups and innovation in the industry by “10 years or more”.
The Silicon Valley startup incubator becomes the second banking casualty of this year after crypto-focused Silvergate Capital announced on Wednesday that it was preparing to liquidate its banking arm. The California-based bank suffered heavy losses from its exposure to collapsed crypto firms FTX and former hedge fund Three Arrows Capital (3AC).
Silvergate was the premier banking partner of many crypto companies including Paxos, Coinbase, Crypto.com, Galaxy Digital, and Circle. The bank also shut down its payment settlement network, Silvergate Exchange Network (SEN), which was used by these firms to exchange fiat for cryptocurrencies.
After a slight recovery at the start of the year, the crypto industry is sinking to new lows with the collapse of two of its largest supporters in the banking sector. At the time of writing, Bitcoin (BTC) is trading at $20,096 – up by 0.9% in the last 24 hours.