Silicon Valley Bank Collapse Aftermath: How Will the Crypto Market Be Affected?

Silicon Valley Bank (SVB), a long-time staple of the technology industry, recently suffered a rapid collapse due to a series of unfortunate actions ultimately resulting in a bank run. The SVB was known for its financing of Silicon Valley VC funds and startups. On the weekend of 10. - 12.3. due to the increasing panic and distrust of SVB risk management, many clients started to withdraw funds from the bank quickly. SVB was rendered unable to fulfil its obligations and therefore shut down.

U.S. regulators stepped in after the collapse to take over the remaining assets. Clients who were fast enough got all of their capital back. But there are a lot of remaining obligations, which will be likely fulfilled over the following months.

What was the root cause?

Experts suggest that Silicon Valley Bank's reliance on risky investments, coupled with a lack of diversification in its portfolio, played a major role in the bank's collapse. Banks are required to hold only a fraction of the capital at their direct disposal, the rest is either lent out or locked in investment assets.

Additionally, the bank's management is being criticized for failing to properly manage risk and failing to take appropriate action when the bank's investments started to go sour. However, the direct cause is not known at this moment.

• The bank was also heavily invested in early-stage tech companies, which are often seen as high-risk investments
• SVB was forced to sell some of its assets immediately at a loss, causing a lack of funds

Cascade of Collapses

Silvergate bank

The first bank in this cascade was a notoriously known crypto-focused Silvergate. One of the large clients of the Silvergate bank was the recently collapsed crypto exchange FTX. For some time, the bank tried to persuade the public and its shareholders that the FTX crash did not impact its holdings and therefore all other clients are safe.

At the beginning of March 2023, this statement has shown to be untrue when Silvergate revealed the rest of its holdings. There were multiple factors during the last months showing the bank's not-ideal health, including its stock, which has been down more than 90 % from its all-time high.

Silvergate has decided to go down voluntarily into liquidation and has announced that all obligations will be fulfilled eventually.

Signature Bank

A curious move from the U.S. regulators happened on 12. March. Supposedly to stop spreading the banking crisis, another major crypto bank was shut down. Ney York-based Signature bank provided services to a big portion of crypto-related clients. According to official statements, the bank had no insolvency issues or other problematic behavior, but simply posed too high of a systemic risk to be kept alive.

A part of the crypto community has understood this action as a show of the negative approach that the U.S. government has against cryptocurrencies. It seemed however to stop the spreading of the distrust.

Are Other Banks at Stake?

According to many economists, the U.S. regulators, namely Fed and FDIC will conduct an auction on the remaining assets of fallen banks, with the intention to fulfil the remaining insured and uninsured obligations. However, they do not plan to cover any losses for the banks' shareholders.

One of the highest priorities for the U.S. government is to create conditions of safety and trust in the system. The mass psychological effects of cascade liquidations like this are undeniable and it is important to ask ourselves if more banks would be endangered by this situation.

In all of the three fallen banks, there have been certain conditions indicating their poor and unsustainable state. Namely client structure, asset management, insufficient liquidity, and so on. Surely there could be other conditions in different banks with the same effect. However, after this cascade, it will be far easier to spot a bank with a similar approach and prevent another potential collapse.

The Crypto Market Reaction

Stablecoins in the Main Role

The crypto market as a whole was not influenced much by the SVB collapse. Apart from stablecoins. Reportedly, Circle, the company issuing one of the biggest stablecoins USDC, held some portion of its reserves in the Silicon Valley Bank.

This information caused a mass sell-off of the USDC, fueled heavily by the fear of missing reserves. The price of USDC at one point was even under $0.9. Most users exited into USDT, ETH, or BTC, dumping USDC on the market. However, some individuals took the opportunity to purchase USDC in a sale.

• USDC suffered depeg due to some of its backing assets being stored in the SVB
• DAI also depegged because of its partial backing by USDC

The Ethereum-native, supposedly decentralized stablecoin DAI was also impacted by the collapse. DAI is issued by the Maker protocol, by creating over-collateralized loans, which serve as a backing for DAI. Unfortunately, a big portion of DAI is backed by USDC. On this behalf, DAI temporarily lost some of its value. Both USDC and DAI pegs are returning to normal as the situation cools down.

Anti-system Hedge

Other crypto assets, namely BTC and ETH are seen as a kind of anti-institutional hedge. After the SVB bank run started, many investors relocated their capital into more decentralized and self-custodial assets, such as the two biggest cryptocurrencies.

Crypto-related banks Silvergate and Signature have naturally sent the price of assets down a few percent temporarily. But reacting to the SVB crash, price action has been only positive, with both BTC and ETH rising over 10 % during the weekend. 

Closing Thoughts 

The collapse of Silicon Valley Bank has sent shockwaves throughout the financial world, but its impact on the crypto market has been relatively low. Some Crypto investors have suffered substantial losses, and stablecoins such as USDC and DAI have been hit particularly hard.

The long-term implications for the crypto market clearly indicate that the system has to be isolated and resilient from outside impacts, as we have seen with centralized USDC. While the collapse of Silicon Valley Bank may have been a warning sign for the broader financial system, it has also underscored the need for greater transparency and accountability in the financial sector to prevent future crises.