Crypto and Fiat Worlds Collide — SVB Explained

As many in the world are quite aware by now, on Friday, March 10, 2023 the 16th largest bank in the United States, Silicon Valley Bank (SVB) collapsed.

But what happened? And how did its ultimate demise eventually carry over into the crypto world — including a de-pegging of USDC? Below we explore the high-level details and timeline of what took place, and what may be to come in the following days and weeks.

Looking Back

The start of the pandemic brought about pain and misery for most of the world, as many people were forced into a combination of mandatory and suggested lockdowns within their homes. However, it also marked the beginning of explosive growth — especially amongst startups, and within the Web3 world — the blockchain industry.

From 2020 to early 2022, money was “easy”, with venture capital flowing into investments left and right, and startups easily raising capital (especially as compared to today’s environment). This all led to individuals, businesses, and the like, being flushed with funds, and needing a place to store it.

Silicon Valley Bank became operational in 1983 to take advantage of the tech scene which would soon engulf the Valley. Over the last 40 years, it has become a trusted banking partner for some of the most recognizable names in business and consumer facing products.

SVB deposits rose from $60B USD during Q1 2020 to nearly $200B USD in just two years, as newly capitalized startups, businesses, and individuals handed over their funds to SVB for safekeeping.

Flush with capital, SVB unsurprisingly looked to put the money to work — an expected practice for all banks so that they could “grow” the money being custodied by the institution.

The Good Times Stop

For the most part, SVB invested the bulk of these deposits in bonds, many of which were earning interest in the 1.65% to 1.75% range. While likely not questioned at the time, these rates are a far cry from where interest rates stand today, as interest rates have risen consistently throughout 2022 and into 2023.

While the good times were rolling (financially speaking) in the early days of the pandemic, the music would soon come to a stop. Rising inflation, unsustainable growth, and business models which no longer made sense with the economy moving back to pre-pandemic activities soon brought expansion to a halt. As mentioned in the preceding paragraph, the US Federal Reserve has been steadily raising interest rates to control inflation.

Tightened monetary policy meant slower growth and less tendencies to invest. The easy money stopped flowing and check writing to fund the latest startup began to drop. In conjunction, bank withdrawals began to increase, as businesses needed to draw down funds to maintain operations. In fact, banks have now seen multiple consecutive quarters where there was a decline in bank deposits.

As withdrawals began to accelerate, SVB deposits continued to be tied up in US bonds — and worse, at a devalued amount. The rising interest rates had significantly devalued their pre-existing bond holdings, such that the sale of any bonds which weren’t held to maturity would lead to significant losses.

With the need to meet customer requests, SVB soon had to sell $21B USD of its securities, which resulted in a loss of $1.8B USD for the company. In conjunction, the bank had to raise capital to meet regulatory requirements.

To the misfortune of the company and to its customers, the capital raise to meet such requirements was never completed — and the FDIC soon took over the bank, declaring it insolvent.

The USDC Tie

A trusted bank for four decades, SVB unsurprisingly had ties to well known companies, including Roku and Roblox. It was also the custodian for Circle, who is the issuer of the USDC coin, for $3.3B USD out of its $40B USD related to its USDC reserves. At the close of Friday evening, US time, USDC had sufficiently de-pegged from the USD, hovering at roughly 90% of its value for several hours — reflective of the amount of deposits tied up in SVB.

On Saturday, 11th March, Circle released an update on the situation between USDC and SVB, wherein Circle provided a further breakdown of how its USDC token was collateralized, and where its holdings were. For the most part, 77% of USDC is sitting in US Treasury Bills, while the remaining is held at other financial institutions ($9.7B in cash). According to the company, as a regulated payment token, USDC will remain redeemable 1:1 with the dollar.

As of this writing, USDC has further recovered, now sitting at more than 96% of its value against USD.

What’s Next

The following days and weeks will be important as other banks may face the same interest rate risks and deposit outflows that SVB fell victim to. While average consumers are generally insured by the FDIC ($250kUSD deposits or less), companies and high net worth individuals with uninsured deposits will undoubtedly be concerned.

Like in crypto, the SVB collapse has shown that diversification can be a useful tool — especially in unexpected and uncertain times. Those who diversified across banks, across assets, across cryptocurrency tokens, likely are feeling less impact today than those who stored the majority of their holdings with SVB.

Update

This article was written during the weekend of 11th March, during which news related to this topic was regularly changing and updating every few hours. As of Monday morning (13th March), the US government has stepped in and assured that consumers who held their deposits with SVB would be protected and able to access their money. Additionally, HSBC has announced that it would be acquiring SVB’s UK unit, and has also confirmed that deposits with the UK entity are safe.

With this announcement, USDC has also more or less fully rebounded, reaching back to its $1 mark not too long after the announcement from the US government and from HSBC.

PARSIQ knows that these can be difficult times, and we encourage our community to take care and to stay vigilant in learning about topics like these. Aside from this, we continue to #BUIDL and to work diligently with customers to understand and resolve their data needs. Despite these challenging times, we continue to be excited about #BUIDLing the plumbing for Web3 data.

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