Silicon Valley and Signature Bank Collapses

This was one of the biggest failures in the banking industry in the US and the largest bank to crash since the end of the 2008 financial crisis. Silicon Valley is now under the control of the Federal Deposit Insurance Corporation (FDIC).

The recent fall has turned the financial market upside down, putting at risk the shares of tiny lenders. At the same time, the bond market has swayed dramatically, and the crypto industry has been affected. Everyone is now waiting for the Federal Reserve's decision to reduce interest rates despite inflation.

With all these happenings, there are a lot of things to track in the upcoming period. One of the most intriguing questions is how will the Silicon Valley Bank collapse affect the crypto industry, which is already highly volatile. What will happen with stablecoins, eg. USDT/BUSD, which are pegged to the most popular fiat currency in the world? How will the fall affect the industry as a whole?

All these questions are soon to be answered…

What Was Silicon Valley Bank?

Although not as large in size as Goldman Sachs or JPMorgan Chase, Silicon Valley Bank nonetheless had a 40-year history when it collapsed. With its headquarters in Santa Clara, Calif, some of its clients were venture capital enterprises, startups, and tech giants. The list included brands such as Roku, Roblox, and Vox Media, among others.

SVB's business exploded during the pandemic. In 2012, the bank invested billions of dollars in the Treasury, backed by the U.S. government. These bonds are known as safe investments that only pay out if held until they mature. Otherwise, long-term treasury bonds tend to lose value with an increase in interest rates.

In 2022, the Federal Reserve started to pump up interest rates to curb inflation. This influenced the value of government bonds, as well as those attached to SVB.

The collapse occurred because Silicon Valley Bank experienced a huge drop in its cash reserves as tech companies began to take back their deposits from the bank. This meant that SVB had to get rid of its bonds while losing $1.8 billion. The announcement terrified the bank’s clients, who continued to withdraw even more money from SVB.

On Thursday, March 9, 2023, clients rushed to withdraw $42 billion in deposits, which led to a drop in SVB's share value by over 60%. The next day, SVB was already in the hands of the FDIC.

How Did The Collapse Affect Other Banks?

The fall of Silicon Valley caused the fall of the entire banking sector. All the leading banks, such as First Republic and Western Alliance Bancorp, experienced a sharp drop in stock values. The same happened with traditional banks, including JPMorgan, Wells Fargo, and Bank of America. Investors thought that other lenders would also face deposit withdrawals, and the impossibility to meet redemptions.

California-based Silvergate Bank, a financial institution with a cryptocurrency-first focus, unveiled its plans to loosen up its operations. Several days later (Sunday, March 12, 2023), regulators took over another bank - Signature Bank. This was a NY institution that had expanded into the crypto market in 2018 and suffered from $10 billion in withdrawals on the same day after SVB's collapse. It was a huge hit for the crypto sector.

Signature Bank Collapse Explained

Right after the closure of SVB, the New York regulator took over another financial institution, Signature Bank - one of the largest lenders in the crypto industry.

As one of the leaders in the crypto market together with Silvergate, the bank had a market value of $4.4n on Friday (Mar. 10, 2023). Based on the details of Dec. 31, Signature held $110.4 billion in assets and $88.6b in deposits.

The New York State Department of Financial Services (NYDFS) declared that it had decided to undertake the institution after losing faith in the bank’s management, because of the failure to provide consistent data. However, a board member of the bank, Barney Frank, accused the agency of closing the institution to “send a very strong anti-crypto message.”

According to the New York Banking Law Section 606, NYDFS (superintendent) is allowed to take over a bank when it “has refused, upon proper demand, to submit its records and affairs for inspection to an examiner of the department” or “is in an unsound or unsafe condition to transact its business.”

The bank has been one of the essential institutions for the industry, allowing digital transactions and having ties with leading crypto companies, such as the Coinbase exchange. The collapse of several banks may impact crypto companies to rethink their current financial holdings and possibly turn to bank options.

According to the words of the Associate Dean at Vanderbilt University Law School, Yesha Yadav:

“It’s very dark days at present for crypto. The big danger here is that the folks decide to go offshore … [where] regulators are having a much harder time monitoring.”

Many of Signature’s clients are crypto-first companies, but the institution also has clients from the legal and real estate industries. In light of these happenings, the chief executive of Circle crypto, Jeremy Allaire, a company behind USDC stablecoin, tweeted that his firm won’t be able to mint or enable redemptions of the coin through Signet (a back-end payment network operated by Signature Bank).

Natasha LaBranche, a spokeswoman for the Coinbase crypto exchange which held $240 million in cash with Signature on March 10, said that the company “continues to operate as usual,” and customers’ funds are “safe and accessible.”

Federal regulators will probably continue to scrutinize other banks with cryptocurrency services. At the same time, old-school financial institutions may pull back from such services, considering the cost of compliance and volatility.

Yadav added:

“Crypto firms have to figure out what to do next. It does not look like many banks are going to be excited to offer crypto firms banking business going forward.”

Circle Kept $3.3 Billion of USDC Stablecoin at SVB

One of the leading cryptocurrencies run by Circle Internet Financial Ltd, USDC, dropped after the enterprise disclosed that it had had $3.3 billion in the collapsed Silicon Valley Bank (~$40 billion of USDC). The remaining USDC reserves at Silicon Valley Bank make up 8% of the assets backing the coin.

USD Coin dropped below 87 cents on Saturday, as per CoinDesk's data. The virtual currency works as a stablecoin and is created to trade at $1. Falling under the pegged value of USD is shocking news for crypto investors, who rely on the consistent nature of the currency. Stablecoins have become an essential part of the virtual-asset structure. Cryptocurrency traders use stablecoins while trying to get in or out of their positions more quickly in highly volatile markets, while companies usually keep their capital in stablecoins.

Stablecoins behave like regular money. If holders believe there are not enough reserves for their holdings, they may decide to exchange or sell them. That causes the price to go down.

Meanwhile, Circle announced that its regulated payment coin (USDC) remains redeemable 1:1 with the USD. The company has also announced automated USDC minting and redemption for clients via new banking partners.

Shortly after Circle’s statement, one of the largest crypto exchanges, Coinbase, informed the public that it is “temporarily pausing USDC:USD conversions while banks are closed.“

On Mar.13, the company announced that USDC:USD conversions have been restored and are now operating normally via API and UI. Additionally, the exchange won't auto-convert USDC on its platform.

Binance exchange also tweeted that they will “temporarily suspend auto-conversion of USDC to BUSD due to current market conditions, specifically related to high inflows & the increasing burden to support the conversion.”

However, Circle was not the only company to be exposed to the collapsed SVB. Many cryptocurrency platforms have already disclosed their ties with the bank.

Ripple’s Brad Garlinghouse tweeted that the enterprise "had some exposure to SVB—it was a banking partner, and had some of our cash balance."

The Avalanche Foundation, supporting the Avalanche blockchain, tweeted that it had "a little over" $1.6m in exposure to Silicon Valley.

What About Signature’s Crypto Clients?

The crypto-first Signature Bank was one of the main partners for multiple crypto firms. Many of them have already disclosed their exposure to the collapsed bank. Coinbase exchange, crypto lender Celsius, and stablecoin provider Paxos are among the leading firms that had funds in Signature Bank.

Coinbase announced it held roughly $240 million in the bank and that it expects a full recovery of the funds.

Stablecoin provider Paxos and crypto platform stated it had $250 million at the bank. It also informed clients about its private insurance that covers the sum not blanketed by the regular FDIC insurance ($250,000 per depositor).

The Celsius Official Committee of Unsecured Creditors, an organization that stands behind the bankrupt lender Celsius, added that Signature Bank “held some of its funds”. However, they didn't disclose the exact amount.

Following these announcements, many crypto companies denied involvement in the Signature Bank’s funds including Crypto.com, Tether, and Immutable X, among others.

Response from Regulators

Following the recent happenings, Federal officials announced that all SVB clients will regain access to their deposits, regardless of the limit of FDIC insurance set at $250,000. Interestingly, most accounts were over this limit. According to the regulator, $175 billion in customers’ deposits are safe.

Deposits at Signature Bank are also secure, and operations at SVB and Signature resumed, allowing account owners to access their money. As a result, companies relying on cash deposits for their daily business operations should carry on their activities as usual. However, shareholders and debt holders are not protected, while senior management has been dismissed.

According to president Biden, "The banking system is safe” and "Your deposits will be there when you need them."

The Federal Reserve also unveiled a $25b program to keep liquidity for banks to cover the needs of clients during turbulent periods.

Did Crypto Cause the Collapse?

The collapse of two banks was not an isolated case. One of the leading cryptocurrency exchanges, FTX, crashed in November 2022 after only ten days. Silicon Valley Bank (SVB) collapsed within 48 hours after depositors ran to withdraw their cash.

Another piece of news comes from Swiss’s bank Credit Suisse, whose shares dropped due to “material weaknesses” in internal controls on Tuesday (Mar 14). All these cases just follow one another, and reconfirm that nothing is certain in the financial world.

Following the recent falls, it will be interesting to see the kind of role cryptocurrencies played in this bank crisis.

According to ABC News, cryptocurrencies didn't have a major role in the banks' collapses-- but they have been widely affected.

David Yermack, professor of finance at NYU's Stern School of Business, said:

"Crypto is more or less a bystander in all of this, just like all the other companies who had deposited money."

Based on his opinion, two main factors contributed to the crisis - the deregulation of the industry over the last five/six years, and the fact that both banks concentrated too greatly on one sector..

Boston College Law professor Patricia McCoy says that the bank's fall occurred due to its massive holdings of the USDC, managed by the fintech brand Circle Internet Financial. She believes that the role that crypto played was all about a huge deposit by Circle. As soon as Circle started to panic about the SVB situation, the logical response was to withdraw the full amount.

Silicon Valley Bank did not have the cash to cover all the withdrawal requests, this hastened the collapse of the system.

Crypto Exposure

Bitcoin has spiked in value at the start of this week, increasing nearly 10% in a few hours following fears about a new financial crisis.

The first cryptocurrency in the world fell below $20,000 on Friday (Mar. 10, 2023) – its lowest value since the beginning of the year.

After the US government disclosed that it would protect clients’ funds, Bitcoin returned and rose in value. At the same time, banking leader HSBC decided to obtain the UK operations of SVB.

The whole crypto industry boomed, including Ethereum (ETH), Cardano (ADA) and Solana (SOL).

Coincidentally, with the bank collapses, Bitcoin climbed over 15% from Friday - Monday (Mar. 10-13) increasing from $19,500 to $22,500.

Ether, the second-biggest crypto in the market, reached $1,600 on Monday, up nearly 7% from Sunday.

Other top coins by market cap—such as BNB, ADA and SOL - exploded between 4% - 8% on Monday.

USD Coin (USDC)—which is designated to follow the U.S. dollar - recovered on Monday and was trading at $0.96. The stablecoin traded as low as $0.88 on the day of collapse.

At the time of writing (Mar. 18, 2023), Bitcoin was trading $27,513.14 per unit, while USDC fully recuperated and traded at $1 per unit.

According to CoinGecko, the current total cryptocurrency market is worth $1.05 trillion. This shows the rally of the entire industry, after regulators announced that they would intervene and guarantee SVB deposits.

Reacting to this trend, crypto trading firm Cumberland tweeted:

"When traders are unsure about crypto prices, they flee to stablecoins and bank deposits. When they are unsure about stables and bank deposits? It's crypto's time to shine, and BTC and ETH rallied 14 and 15%, respectively, over the weekend amidst uncertainty in the banking sector".

Many experts compare this crisis with the Cyprus banking failures in March 2013, when cryptocurrency rose 178% to $93 and reached a record high of $265 in May 2013.

However, both the financial and crypto industry will feel the effects of the big collapses for quite some time. It's not necessary to say that crypto traders will probably reconsider every decision they make in the future. Perhaps crypto holders should remember an old lesson that says - ‘Not your keys, not your coins', as history repeats itself over and over again.