The death spiral in the fintech and crypto sector continues to spin. It started in 2022 with the collapse of the crypto sector last year, which also dragged down the FinTech sector. On 10 March, Californian Silicon Valley Bank (SVB) was taken over by the regulator due to a bank run resulting in lethal liquidity issues. The shutdown of the bank, systemically critical to the U.S. startup and crypto scene, will most certainly trigger more bankruptcies among their clients.
Largest Bank Failure
Silicon Valley Bank, the 16th largest in the U.S., with some $209 billion in assets as of Dec. 31, was a much-respected institution in the U.S. startup and venture capital scene. According to the regulator, the bank was in sound financial condition on Wednesday, the regulator said. However, a day later, it was insolvent. This is called panic, which causes bank runs, which destroy banks. It was the biggest bank failure since the financial crisis in 2008.
Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank.
California Department of Financial Protection and Innovation (DFPI)
SVB’s collapse dragged down the financial services industry in the U.S. Investors dumped the shares of banks big and small on Thursday, shaving $52 billion off the four largest U.S. banks alone.
Investors are worried about banks with a similar profile to SVB. Shares of San Francisco-based First Republic Bank, which caters to businesses and wealthy individuals, have fallen about 30% since Wednesday. Shares of PacWest Bancorp have fallen 54% in the past two days. The shares of New York-based Signature Bank lost 37% this week.
The Crypto Collateral
WSJ reported that Circle Internet Financial Ltd had $3.3 billion of its stablecoin USD Coin (USDC) reserves, about 8% of the roughly $40 billion in assets backing the token, tied up in the collapsed Silicon Valley Bank. The USDC consequently lost its dollar peg. Thus, crypto exchanges Binance, Coinbase, Vaultoro and others temporarily suspended their USD Coin conversions.
The large crypto exchangers Binance, Coinbase, Galaxy Digital, and Gemini said they have no banking relationship with Silicon Valley Bank.
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