The collapse of Silicon Valley Bank has a lot to do with the recent rise of interest rates, and yet, the impact of its shutdown will still be felt significantly throughout the crypto sector.
Silicon Valley Bank served as the bank of choice for 44% of tech companies in the U.S. that were backed by venture capital. With the tech market in decline, startups had to rely on their deposits at the bank to keep themselves afloat, and that’s when SVB started to face capital problems.
As the Federal Reserve continued to raise rates, the worth of the treasury bonds held by SVB decreased. Fresco Capital managing partner Stephen Forte told Decrypt, “At the highest level, SVB was actually being conservative and purchased U.S. Treasuries and kept them on their books, both short-term and long-term.”.
This would not have been a problem if the bank, which was already low on capital, hadn’t been required to realize its losses from the treasury bonds. “The narrative on Twitter led to a bank run and then when you have to sell those treasuries at a loss, it all comes crashing down,” Forte said.
On Thursday, SVB customers initiated $42 billion in withdrawals. The next day, Nasdaq suspended trading of the bank’s shares and SVB was ordered by California state banking regulators to cease operations. The Federal Deposit Insurance Corporation, appointed as SVB’s receiver, stated that those with less than $250,000 in SVB accounts will have complete access to their funds no later than March 13th. Everyone else will have to wait.
CEO of Shipyard, Mark Lurie, commented that this is the toughest outlook he has ever seen for raising capital. “I’ve been in this game since 2012 and this is the worst environment,” he told Decrypt. “The median valuations were around $35 million late winter. As of a few weeks ago, it was up to $50 million. I think it’s probably going to go back down.”
Shipyard, a software company that operates on Ethereum, Optimism, Polygon, Moonbeam and Arbitrum, had no funds in an account at Silicon Valley Bank. Lurie was concerned as many of the venture capital funds and liquidity providers that Shipyard and other tech startups rely on were SVB customers.
“Being put into receivership doesn’t mean no one will get their money back,” Lurie said. “It’s different than a bankruptcy. It’s not like SVB doesn’t have assets, but it’s not clear how long it will be before people can get their money back.”
The collapse of Silicon Valley Bank and Silvergate Bank have left crypto companies wondering how to make payrolls and where to bank. Y Combinator president and CEO, Garry Tan, revealed that 30% of the incubator’s portfolio companies had accounts at SVB, and without access to their funds, they won’t be able to pay their staff in the next 30 days. “This is an extinction level event for startups and will set startups and innovation back by 10 years or more,” he said.
Protocol Labs, the R&D company behind Filecoin and InterPlanetary File System, suggested a few options in an email sent to its portfolio company founders. “It is unclear what the larger fallout from this will be in terms of VC investment and the macro impact,” the company wrote. “This and FTX reinforce the importance of diversifying your assets and banking/investment partners.”
Circle, the issuer of USD Coin, cut ties with Silvergate Bank just last week and stated that USDC minting and redemptions were working properly. According to its cash reserve attestation from January, Circle holds a portion of the reserves backing $43 billion of circulating tokens in Silicon Valley Bank.
“Silicon Valley Bank is one of six banking partners Circle uses for managing the approximately 25% portion of USDC reserves held in cash,” a Circle spokesperson told Decrypt. “While we await clarity on how the FDIC receivership of Silicon Valley Bank will impact its depositors, Circle and USDC continue to operate normally.”
