Silicon Valley Bank (SVB) took center stage as reports revealed that the bank had shut down, sparking widespread panic. The crypto scene took a hit as well, compounding the already existing fear among investors. But what happened, and how is SVB’s implosion significant?
Silicon Valley Bank collapse: a brief recap
During its heyday, Silicon Valley Bank boasted assets of over $200 billion, ranking it as the sixteenth largest bank in the US. Its core clientele consisted of venture-backed technology firms, as well as professionals within the tech industry. The bank experienced significant expansion throughout the pandemic and beyond, as it became the preferred banking choice for many venture capitalists and startups within the tech industry.
Amid this boom, SVB acquired a significant amount of US Treasuries and Government Mortgage-backed securities (MBS), which are generally regarded as low-risk investments. However, the value of these securities is closely linked to prevailing interest rates.
With the Federal Reserve initiating its interest rate hikes campaign to address the surging inflation, the value of these securities began to decline significantly. Additionally, the venture capital firms that relied on SVB for banking services encountered difficulty securing additional capital as interest rates across the economy experienced a substantial increase. This led to a gradual withdrawal of funds previously held by these firms in SVB.
As these firms began to make withdrawals, Silicon Valley Bank was compelled to sell off its securities at a loss to satisfy the withdrawal requests. As a result, SVB incurred a loss of approximately $1.8 billion. However, the situation was further exacerbated by SVB’s announcement of intentions to sell new shares worth $2.2 billion to address a shortfall in its balance sheet.
The disclosure sparked widespread panic, prompting venture capital firms to advise their clients to withdraw funds from the bank. As a result, a massive bank run occurred, resulting in a liquidity crunch. To prevent further harm, California regulators intervened and took control of the bank’s assets.
How does it affect the crypto scene?
Silicon Valley Bank, being one of the prominent banks in the United States, had extensive connections with diverse crypto entities and companies involved in the digital asset industry. The SVB crisis ensued shortly after Silvergate’s voluntary liquidation. This generated a state of apprehension, given the past instances of contagion within the crypto domain.
Widespread conjectures about the possibility of a contagion emerged, and experts speculated on which companies might be impacted. Much like the Terra, Three Arrows Capital (3AC), and FTX situation, a wave of contagion could ensue if the bank has substantial exposure to numerous crypto firms.
Who is affected?
As the situation evolves quickly, some crypto entities have made public declarations about their exposures to Silicon Valley Bank. Meanwhile, there are rumors that other companies might have significant financial ties with the bank, but there has been no official confirmation or refutation of these speculations yet.
Circle seems to have suffered the most significant blow, based on the information available to the public. According to the firm’s statement on Saturday, a considerable portion of its USDC reserve, amounting to $3.3 billion, is currently trapped in SVB. This amount represents 8.2% of Circle’s total USDC reserve, which stands at $40 billion.
Amid the widespread panic and redemptions, some exchanges had to suspend their USDC conversion services. Binance stopped the automatic conversion of USDC to BUSD, while Coinbase temporarily halted the conversion of USDC to USD. Similarly, Robinhood suspended both USDC deposits and trading. USDC’s value depegged from the US dollar, plunging to a record low of $0.87 on March 13.
Meanwhile, bankruptcy documents from BlockFi, a failed crypto lender, disclosed that the company has a significant $227 million exposure to Silicon Valley Bank. The filing also revealed that the bankruptcy trustee raised concerns about BlockFi’s position in SVB on Monday, citing that the exposure is not insured by the FDIC, as it’s in a mutual fund. The trustee further emphasized that this position is not compliant with bankruptcy law.
Ripple CEO Brad Garlinghouse acknowledged that the company has some exposure to Silicon Valley Bank, in a series of tweets on Sunday. Although he didn’t disclose the precise extent of the exposure, Garlinghouse reassured stakeholders and investors that the company’s daily operations would not be disrupted, as Ripple “remains in a strong financial position.”
Amidst the chaos, Bored App Gazette, a Twitter-based media outlet that covers Bored Ape Yacht Club (BAYC) developments, shared comments from Greg Solano, co-founder of Yuga Labs, who confirmed that the company has some exposure to Silicon Valley Bank. Nevertheless, Solano stated that Yuga Labs’ exposure was “super limited.” It reportedly did not impact the company’s business or plans.
Proof, another prominent NFT project, acknowledged that they have some cash deposited in Silicon Valley Bank, which has become inaccessible. In a tweet posted on Friday, Proof reassured the community that its assets are diversified across different currencies, including fiat, ether (ETH), and stablecoins. Therefore, exposure to SVB will not impact the company’s operations. However, the team didn’t disclose the exact amount of exposure to the bank.
Avalanche, a prominent blockchain platform, also confirmed that it has some funds currently inaccessible in Silicon Valley Bank. In a March 11 tweet, the team behind the project revealed no exposure to Silvergate. However, they held $1.6 million at Silicon Valley Bank.
A16z, Pantera Capital and Paradigm
According to recent reports, it is believed that prominent crypto-focused venture capital firms, including a16z, Pantera Capital, and Paradigm, may have a combined exposure of over $5 billion in Silicon Valley Bank. However, this information is based on unverified data from the US Securities and Exchange Commission (SEC) ADV file.
The scraped data disclosed that a16z-related funds had around $2.85 billion in Silicon Valley Bank as of May 2022, while Paradigm-related funds were exposed to the bank with an amount of $1.72 billion as of January this year. Furthermore, Pantera-related funds had approximately $560 million in the bank last month. It should be noted that this information is from scraped data and has not been independently verified.
It is also important to note that the data obtained from the SEC filings only provides a snapshot of the exposure of the VC firms to Silicon Valley Bank at a specific point in time and does not reflect any deposits or transfers made by the firms after the filings were made. Therefore, the current exposure of these firms to the bank may differ from the numbers reported in the filings.