The financial industry in the United States has been in a frenzy lately after the collapse of one of the country’s biggest banks, Silicon Valley Bank. While the technological and crypto industries were the most affected by the collapse, it also affected other sectors of the United States economy.
Many analysts have termed the SVB collapse one of the worst bank failures since the 2000s, and rightly so. In all the chaos that followed the collapse, not many people knew exactly what caused it.
There is a high chance you don’t have a clear idea of what happened either. So, in this article, you will get all the details concerning the Silicon Valley Bank, including how and what caused the bank’s collapse, how it affects the crypto industry and the way forward.
March 8th: The major date on which the SVB collapse started was the 8th of March 2023, when it sold all its available-for-sale shares. They sold $21 billion of securities and came close to a $2 billion loss.
March 9th: Investors began to grow cold feet over SVB shares, and its share price declined. It lost more than 40% of its value, and SVB hasn’t recorded such losses since 1998. But things would only get worse.
March 10th: It was on this day that the collapse finally happened. The California regulator shut down Silicon Valley Bank, and clients started scrambling to get their funds out.
March 12th: The federal government stepped in and promised that they would make efforts to ensure that every client owed money by SVB, especially under insurance, gets their money back.
What Really Happened with SVB
Silicon Valley Bank (SVB) is a financial institution founded in 1983 in Santa Clara, California. Since Silicon Valley is dubbed the “tech hub of the world”, it had the best target customers within its reach. With time, SVB became the major bank that housed all the major industries in Silicon Valley. The big and small tech corporations in Silicon Valley were banking with SVB, and SVB, in return, provided the funds needed to run those companies.
Since many startups got investments from venture firms, SVB soon became a major financial institution that had almost all the financial transactions going on in Silicon Valley in its pocket. As an integral player, Silicon Valley Bank was greatly interwoven within the tech and crypto industries, such that whenever the industry was flourishing, SVB was thriving and vice versa.
The crypto and tech industries have had such a bumpy ride in the past months that it didn’t come as a surprise that big tech and fintech, in particular, could suffer some downturn. However, Silicon Valley Bank seemed to thrive amidst the problems, which was a big shock for many.
Many experts believe that Silicon Valley Bank’s mode of operation and business model greatly contributed to its failure. For example, when Silicon Valley Bank gets deposits from customers, they invest them in long-term safe securities such as bonds. Before their collapse, this had been working for SVB, helping them generate profit and maintain customers’ funds.
Not until recently, the Federal Reserve increased interest rates as the tech industry experienced a huge slowdown due to the bad economy. Subsequently, this affected SVB as they couldn’t keep up because their investments were failing, and their customers had been withdrawing funds. It should be noted that when interest rates are increased, bond rates drop in value.
As these happened, SVB’s parent company, SVB Financial Group, said they would sell some of their shares to recover customers’ funds. They sold $21 billion of securities at an almost $2 billion loss to replace customers’ funds. This move from SVB worsened things as many investors and clients began to know what was happening to the bank. Immediately, SVB’s share price went down the drain, and at some point, the trading of its shares was halted.
There were reports of SVB getting sold, but it never happened; rather, it collapsed even further.
Several crypto companies were heavily affected by the Silicon Valley Bank collapse on March 10, 2023. The latest exposure showed crypto firms had one of the biggest funds stuck at SVB.
BlockFi is a crypto firm affected by the SVB collapse, with millions of dollars stuck at the bank as efforts are already being made to recover those funds.
The situation also affected Yuga Labs, but the crypto firm has failed to reveal how much that is stuck with SVB. The NFT company simply said their SVB exposure is “limited.”
Avalanche exposure at the Silicon Valley Bank collapse was minimal compared to other crypto firms. On their Twitter page, they announced that their exposure at SVB was only over $1 million.
U.S. cryptocurrency firm Circle was the major highlight of crypto firms affected by the Silicon Valley Bank collapse; the firm had about $3.3 billion in the bank. The news affected its stablecoin, USDC, as it depegged from the US dollar.
Although the USDC was the number two stablecoin in the crypto market, it caused a huge scene and damage within the industry when it depegged from 1 USDC to 1 dollar. One USDC traded below one dollar, leading to a massive scare in the crypto market.
When the news broke that Circle had $3.3 billion at SVB, those holding USDC started panic selling. It even made top crypto exchanges stop trading and conversion of USDC. First, the stablecoin started trading below $0.90 and dropped to $0.87. However, the stablecoin has started recovering after trading at $0.91 and is back up to almost parity.
For USDC, it is thankfully not another TerraUSD scenario, as only a tiny part of its backup reserves was affected. With about $3.3 billion of its $40 billion market cap reserves at the SVB, USDC has a high possibility of returning back to normal activities quickly.
There’s no doubt that many things would change as the tech and crypto industries move past the Silicon Valley Bank collapse era. First, the Deposit Insurance National Bank of Santa Clara said those with their funds at SVB insured would receive their money back quickly.
However, uninsured funds are a little uncertain, as the Federal Deposit Insurance Corporation said that those with uninsured funds are at risk.
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