Silicon Valley Bank follows Silvergate into the abyss—what comes next?

The Silicon Valley tech community is running around with its hair on fire today, following the dramatic collapse of its namesake bank, Silicon Valley Bank (SVB). The so-called “default bank” for Silicon Valley startups was reported to do business with over 50% of VC-funded companies. Its failure is already causing a ripple effect that could spread far beyond the technology industry.

SVB will now need assistance from the Federal Deposit Insurance Corp. (FDIC) to have any hope of making its depositors whole, although even Federal Government assistance has limits. State financial regulator the California Department of Financial Protection shut the bank down after finding “inadequate liquidity and insolvency,” after an attempted bank run. The bank had reportedly lost over US$80 billion in just 24 hours.

Parts of the blockchain and digital asset world also fell into turmoil, only this time it was where investors least expected it: Circle’s usually-steady “stablecoin” USDC lost its dollar peg late Friday night, and at press time is currently valued around $0.90. Though Circle had attempted to remove its dollar reserves from SVB on Thursday, the collapse left US$3.3 billion of its roughly $40 billion USD trapped in the frozen account.

1/ Following the confirmation at the end of today that the wires initiated on Thursday to remove balances were not yet processed, $3.3 billion of the ~$40 billion of USDC reserves remain at SVB.

— Circle (@circle) March 11, 2023

Silicon Valley Bank’s collapse was the second tech-related banking failure in a week. The blockchain industry was already reeling from the March 8 crash of smaller Silvergate Bank, also in California, which had a lot more blockchain business on its books. Though Silvergate didn’t require a rescue from the Fed, it was forced to sell off its own securities reserves at bargain prices to pay depositors.

Both banks have fallen victim to the past year’s “crypto contagion” (mostly in the form of FTX and related failures) and wider turmoil in the economy. SVB had reportedly purchased $80 billion in mortgage-backed securities in 2022, which had become less attractive to investors after the Federal Reserve raised its benchmark interest rate. It attempted to raise cash by selling some of those assets right when Silvergate shut down, prompting a tech-industry bank run that hit SVB’s deposits hard.

Just how bad the fallout will be, how long it will last, or how far it spreads, remains unknown. It’s a sign of just how quickly events in the financial world are unfolding—just a few days ago, SVB was patting itself on the back for making Forbes’ “Financial All-Stars” list and appearing on its “America’s Best Banks” rankings in February.

SVB likely fell victim to a classic case of bad timing and other incidents beyond its immediate control. Both have become more common in recent times. Investors and even ordinary workers are nervous amid abnormally high inflation, job losses, and a geopolitical environment that’s unstable (to say the least). At this point, any hint of bad news could cause another 2008-style collapse. There’s also a widespread feeling that lessons from 2008 were neither learned nor fixed. Short-term, media-friendly “plans” without much thought given to future impacts have become the norm. National debts have skyrocketed as governments around the world pumped trillions of new dollars into their economies—first in 2008 and then again in 2020 to ward off a recession caused by COVID-19 related shutdowns.

What happens to blockchain now?

“Crypto Twitter” had a mixed response to the Silvergate/Silicon Valley Bank crisis. There were the usual “this is a sign you should buy Bitcoin” posts, which themselves have an air of bag-pumping desperation these days. On the other hand, the digital asset industry has a lot more exposure to “traditional” investors than it once did. Gone are the days when BTC, ETH and current coins-of-the-moment would pump following bad banking news. The people whose investments financed those massive bull runs in 2017 and 2021 see digital assets as just another investment, to potentially be abandoned when trouble hits the stock markets. CoinMarketCap has tended to follow mainstream investment trends rather than bucking them in the past few years.

It would be great if people took more of an interest in improving blockchain technology and developing new use cases, rather than coin prices. However, the reality is that “buy, hold and hope” is still the main strategy for a large segment of the blockchain-curious audience—and that audience expects its coins to pump 100x or more, whether they contribute or not. They will continue to pour life savings into digital assets, and complain and blame blockchain industry leaders for any disappointment.

Although Bitcoin was born amid 2008’s Global Financial Crisis (and was purported by its early fans to be a protection from such events) the blockchain world hasn’t yet weathered a large-scale systemic crisis affecting multiple modern economies. People in countries experiencing collapse have not flocked to BTC or ETH as a monetary safe haven, largely due to price volatility and scaling capacity problems. The day may come where everyone wishes they’d focused more on making blockchain useful, rather than more (dollar) valuable.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.