The Silicon Valley Bank(SVB), has been the recent financial Institution to close its doors to the public. Elsewhere, Silvergate Bank announced its plans to liquidate its crypto assets in a recent report. These 2 events could seem unrelated but it has the public worried whether this is a tip of the iceberg. The situation has been described as the worst since the financial crisis back in the year 2008 and is set to bring down many giants as tough economic times lie ahead. The collapse of SVB comes barely a day after the SEC(Securities and Exchange Commission) introduced tighter interest rates as inflation hits 1 700%.
The SVB was forced to close its doors by regulators in the US due to lack of enough liquidity. The bank is a major player in financing tech projects among them startups looking for funding in the web3 and blockchain sector. The bank alone supports up to 44% of venture-based capital startups in the US alone and its closure has already sent shockwaves as far as India where many startups have been affected. Users of the Bank have taken to social media platforms to complain about their inability to withdraw their cash from the bank. With the high number of withdrawal requests, the already ailing bank lacked enough liquidity to support the massive withdrawals and was forced to sell its long term loan portfolio at a great loss in an effort to remedy the situation. This sale however was the final strike on the bank since it did not solve the problem leading to its ultimate closure.
The tech community is among the most sensitive sectors when it comes to hiking of interest rates. Ever since inflation hit, the cryptocurrency market has been on a trend towards collapse. This is indicated by the plunging of cryptocurrency prices including Bitcoin which at one point lost 65% of its value. The resulting pressure also led to the collapse of FTX which is still facing criminal charges in the courts across the USA. Bank that are affiliated to tech products have seen their assets and stocks decline rapidly in recent days. This decline led Silvergate Bank to enter liquidation this week. It is only a matter of time before other interest sensitive industries dance to the tune.
SVB is the go to bank when it comes to financing of big startups. Its location in the Silicon Valley that is buzzing with tech startups ranging from Web3, AI and other blockchain related projects played a major role in its survival. By the end of 2021, the bank had more than $189 billion in deposits, a figure that had grown 3 times since 2019. With a lot of money at its disposal, SVM made investments by buying long-term treasury bonds from the US treasury. The strategy could have worked were it not for the constant interest hikes from the government that made the bank’s long-term bonds way expensive for investors who opted for better securities and bonds from the US Treasury. Its prices therefore plunged making the investment portfolio worthless in generating any return on investment.
USDC, a crypto project, is the latest victim of the closure of SVB. The project keeps a staggering $3.3 billion reserve at the SVB. The startup has a total of $40 billion in reserves spread across several banks in the US. The startup initiated a wire transfer to remove its deposits from the bank but till now it has not yet been processed. Authorities are however giving assurances that those who insured their deposits will be protected from the fallout. Apart from USDC other crypto projects including Avalanche, Pantera and the now defunct BlockFi are facing exposure to SVB. Owing to this fact, crypto exchanges like Binance and Coinbase have suspended any further USDC conversions because some of their reserves reside in the closed bank.
A more comprehensive evaluation on the effect the closure might have in the crypto sector has yet to be done. The fact that SVM is the largest bank that finances tech startups in the US makes the situation even worse. The closure is also set to affect the crypto community in the rest of the world since several startups had invested or deposited their reserves in the bank. It the global economic recession creating a setback in crypto adoption? Make your opinion known below.
