Silicon Valley Bank’s collapse causes $USDC stablecoin to depeg, affecting other stablecoins as well. Read on to learn more about the events leading to this and the impact on the crypto market.
Silicon Valley Bank (SVB), the 16th largest bank in America and a key player in financing venture-backed startups (especially web3 startups), recently collapsed in just 48 hours. This has been the second-largest bank failure in US history and has led to severe consequences for the cryptocurrency industry.
What led to the downfall of the bank, and how does this relate to the cryptocurrency market?
Starting way a few years ago, SVC experienced a meteoric rise in deposits, going from $62 billion in March 2020 to $124 billion in March 2021. So you may be thinking, how did things end up this way despite this massive success?
Unfortunately, the answer lies in where the infamous bank invested these assets. SVB invested these funds in long-term treasury bonds, but rising interest rates caused the securities to lose most of their value. It was reported that the bank resulted in a whopping $15 billion in unrealized losses.
Meanwhile, startups began withdrawing their funds faster than SVB could handle, forcing the bank to sell its long-term securities at a loss of $1.8 billion.
As a result, the bank had to sell over $21 billion worth of investments and borrow $15 billion. The bank run caused panic, resulting in customers withdrawing $42 billion and a negative cash balance, ultimately leading to SVB’s takeover by the FDIC on March 10.
How it affected Crypto
The collapse of SVB has caused hardships for many tech startups, and it has also affected the cryptocurrency market.
Circle, the issuer of the second-largest stablecoin, USDC, confirmed that it had $3.3 billion in SVB Bank. This caused rumors to spread and eventually led to USDC losing its peg. Coinbase paused USDC: USD conversions and Binance stopped auto-conversions of USDC to BUSD.
The debugging of USDC caused panic and also affected other stablecoins, such as DAI and FRAX, which are partially backed by USDC.
This situation highlights the overreliance on centralized entities and the need for decentralized solutions in the cryptocurrency market. MakerDAO, for example, currently has over $3.1 billion worth of USDC collateral backing DAI. While this problem is known, it has not yet been solved. The collapse of SVB also emphasizes the importance of due diligence when investing in stablecoins and other cryptocurrency assets.
In conclusion, the collapse of SVB has had far-reaching effects beyond the traditional banking sector, showing the interconnectedness of the financial system.
The cryptocurrency market, which is still relatively new and unregulated, is particularly vulnerable to such shocks, and this event serves as a reminder of the need for caution and risk management.
Edmond is a passionate writer for Video games, GameFi and Web3. He has worked for top GameFi companies and video game/crypto news websites.