Silicon Valley Bank’s Collapse: What It Means for the Crypto Industry

On March 10, 2023, the California regulatory agency, the Department of Financial Protection and Innovation, urgently announced the closure of Silicon Valley Bank (SVB) and entrusted the Federal Deposit Insurance Corporation (FDIC) to take over. The once darling of the Silicon Valley financial community suddenly fell. SVB became the first FDIC-insured institution to go bankrupt in 2023. The bank also made history: it became the first bank to be liquidated with only a sell rating.

According to official data from the Federal Reserve, Silicon Valley Bank is the 16th largest bank in the United States. Most of its clients are high-tech and biotech startups. It also provides financial services to several cryptocurrency-focused venture capital firms, including Andreessen Horowitz ( a16z ) and Sequoia Capital.

As of December 31, 2022, the asset size was approximately US$209 billion, making it the largest bank to fail since the 2008 US financial crisis, second only to Washington Mutual Inc., which failed during the crisis. Lehman Brothers had total assets of US$639 billion when it went bankrupt that year.

Depositors with accounts over $250,000 face uncertainty

According to Bloomberg , more than 93% of the bank’s $161 billion in deposits are uninsured , and three sources familiar with the matter said that earlier this week, several cryptocurrency companies had taken action to withdraw cash deposits held in custody at the bank.

The FDIC website states that deposit insurance is capped at $250,000 per depositor, per FDIC-insured bank, and per ownership category, and the amount of deposits that exceeded the insurance limit when Silicon Valley Bank closed has not yet been determined. To protect insured depositors, the FDIC created a new entity called the Santa Clara Deposit Insurance National Bank (DINB). The FDIC said DINB will maintain Silicon Valley Bank's normal business hours, and bank activities, including online banking and other services, will resume no later than Monday. The agency explained on Friday: "Once the FDIC receives more information from the bank and its customers, the amount of uninsured deposits will be determined. Depositors with accounts over $250,000 can contact the FDIC for a resolution."

Crypto firm exposure is “small”

In its year-end SEC 10-K report, SVB said it has “minimal exposure to cryptocurrencies and digital assets through the provision of loans, deposits, and investments to customers engaged in these industries.”

Binance , Gemini , and Galaxy Digital have all announced that they have not opened accounts with SVB. The reserve report released by Circle on January 17 showed that approximately US$9.88 billion in cash was deposited in regulated banks, including SVB, but the specific exposure was not disclosed. Given that the company also listed six or seven bank clients including New York Mellon, Customers Bank , and New York Community Bank , all eggs are not in one basket, and the exposure to USDC may be controllable.

SVB’s collapse comes shortly after Silvergate Bank , a cryptocurrency-friendly financial institution, announced its voluntary liquidation earlier this week.

Both banks went bankrupt due to the same challenge: a classic bank run, and concerns about systemic risk hit the entire financial market, including the cryptocurrency industry. Bitcoin has now fallen from $22,000 to around $19,000. The global cryptocurrency market capitalization has also been affected, falling from the psychological level of $1 trillion to around $900 billion.

The crisis not only affects the banking industry, but also the global crypto market capitalization and the price trend of digital assets. The market may move lower and retest key support, thus delaying the arrival of the crypto bull run predicted by many analysts.

What does this mean for crypto VCs?

The crypto industry is not directly tied to the fall of SVB, but there are concerns that the bank’s demise could affect digital asset players — especially given the number of venture capital firms that used SBV to make crypto investments. Silicon Valley Bank is the most important startup bank in the United States, and its demise would mean tough times for startups, including early-stage crypto companies.

The most direct pressure on Silvergate and SVB is the Federal Reserve's interest rate hike. Higher interest rates and rising U.S. Treasury yields will reduce new investment in high-risk industries including technology and cryptocurrencies.

Kaiko researcher Connor Ryder commented: "The collapse of the big banks is a reminder of how brutal the bear market can be. In the short term, the biggest impact of this banking contagion will be reduced market liquidity, which will lead to greater price volatility in both directions."

Oanda analyst Ed Moya stressed: "Crypto banking is taking a double whammy as concerns grow that any bank tied to cryptocurrencies may be in danger, and as concerns grow about financial instability in parts of the banking industry. Only a handful of publicly traded banks have crypto exposure, and many traders are rushing to short them."

Kaiko liquidity data shows that U.S. crypto exchanges have been affected by reduced liquidity in the past few days as market makers have adopted a wait-and-see attitude towards the crypto industry. On-chain data from blockchain analysis firm Nansen shows that $3 billion in USDC has been withdrawn from centralized exchanges in the past 7 days.

Connor Ryder said: “The crypto industry is waiting for banks to step up and ‘welcome’ crypto deposits, but it may have to wait a while longer - the big banks are currently reluctant to take on crypto clients due to the risks they bring. The candidate may come from a smaller bank, but they will not rush to take action after the collapse of Silvergate.”

Some industry insiders believe that the financial headwinds caused by SVB are controllable. Mark Haefele, chief investment officer of UBS Global Wealth Management, told Bloomberg: "We are not seeing typical signs of contagion, such as pressure in the interbank lending market, but there is now very clear evidence that the Fed's interest rate hike policy is having an impact on the financial system and the economy, and the side effects of the rate hike are beginning to appear - although this is not enough to stop them, but they will consider it."

U.S. federal regulators are paying close attention to the matter. Treasury Secretary Janet Yellen convened leaders of the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency on Friday to discuss developments at Silicon Valley Bank. Yellen expressed confidence that banking regulators will take appropriate responses, noting that the U.S. banking system remains "resilient" and that regulators have effective tools to deal with such incidents.