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Last weekend, the crypto market took a hit and the stablecoin USDC deviated significantly from its peg. The reason turned out to be a collapse of an American Silicon Valley Bank. Though the situation now seems under control, with the losses recovered by a market surge, should you be worried about it? We aim to answer these questions in this news recap.
How Was Silicon Valley Bank Connected To Crypto?
Silicon Valley Bank (SVB), founded in 1983, was a prominent American bank catering primarily to the tech sector and its investors. Despite being the sixteenth-largest bank in the US, its collapse became the second-largest in its history: at the start of 2023, it accounted for $209 billion in assets.
The alarm bells started ringing on Friday, when the parent company of SVB, SVB Financial reportedly started looking to raise capital and, when failed, sell the bank. This was enough to trigger a bank run and garner the FDIC’s attention, which shut the bank down to protect the clients’ assets.
The curious thing about the reason SVB went under is that its balance sheet did not have anything to drag it down. It held high-risk assets, including cryptocurrencies and crypto startup IPOs, but the tech sector and crypto market were doing fine. Most likely, it was the lack of proper risk management that ultimately was SVB’s undoing.
Two More Crypto-Friendly Banks Closed Sunday
The SVB collapse was going on against the backdrop of two other crypto-friendly banks going under: Signature and Silvergate. Unlike in the sudden collapse of SVB, Silvergate was long “less than well-capitalized” because of the FTX collapse and settled on self-liquidation voluntarily. It served some crypto industry major players like Circle and Coinbase but in the end, discontinued its crypto service Silvergate Exchange Network and was cut off by its corporate clients as well.
The last one to go down so far was Signature Bank. It was also shut down by the FDIC on March 12, 2023. Despite their attempts to distance themselves from the crypto market during the downturn in 2022, as Silvergate was going down, its crypto-related workload temporarily increased nonetheless.
Tables Turn: Crypto Companies Suffer From Exposure To Banks
In an ironic twist of fate, it was not exposure to trouble on the crypto market that caused the meltdowns (though it could be argued in case of Silvergate). This time, crypto companies took losses due to being exposed to failed banks.
As we mentioned earlier, Silvergate was a banking partner for Circle and Coinbase. Other crypto giants counting losses from its downfall are Paxos and Celsius. Now all of them rely on FDIC to recover their clients’ funds from the failed bank.
The losses from Silvergate’s closure amounted to hundreds of millions of dollars. But with SVB, the damage to Circle’s clients alone comes up to billions. Some $3.3B out of the reserves for the consortium’s stablecoin USD Coin (USDC) were kept in that bank.
On Friday, as the news broke, it caused a liquidity crunch of its own in the USDC markets. As some were trying to redeem USDC, others drove it down and made it lose its dollar peg. Needless to say, it exacerbated the market conditions. At the lowest point, it was trading for $0.88, destabilizing other markets as well. However, at the time of writing, the USDC peg seems to have regained its stability.
What Next? Takeaways and Forecasts
The situation seems to have shaken out by the start of this week, as the crypto market heads into recovery. However, the stock markets are surrounded by fears that the SVB collapse will cause contagion in the tech sector. Even if the cryptocurrency markets rebound short-term, the effects of their correlation to stocks may appear in the long term.
On a more practical level, US-based crypto investors and companies lost not one, not two but three banking options over a single weekend. In no modest words, this situation is drastic. Crypto holders overseas felt the shock to a larger extent on the markets than in their day-to-day lives.
The banks collapsing may be reminiscent of the 2008 financial crisis but the experts assure it is not as dire. The Fed stepped in to help FDIC and ensure all creditors will be paid back, which gives the crypto companies exposed to Signature and SVB the ground to announce all deposits will be safely returned.
However, even if the contagion is stopped and further losses prevented, the climate that created the SVB before the fall remains. One of the angles is SVB’s assets and liabilities held long term were losing value in the rising rates climate, becoming one of the reasons it failed. If that were true, then unless the economic policy of the US is changed somehow, more collapses could follow.
The likelihood of this catastrophic scenario bringing down crypto is extremely low. It is true that the cryptocurrencies’ valuations are correlated with stocks, but the crypto economy is not solely reliant on the US economy.
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