Did you hear about Silvergate Bank and Silicon Valley Bank? They recently went belly-up and it’s causing major drama in the financial world. These two banks were among the largest in the United States, so everyone is freaking out about what this means for the rest of the banking system and how safe our money really is. It’s not just affecting traditional banking. The crypto industry is taking a major hit too.
In the aftermath of the collapse, many people attributed the blame to crypto. However, crypto could be the solution rather than the root cause of the problem.
The collapse of Silvergate Bank
Silvergate Bank was a reputable institution in the crypto world, known for being super friendly to the space and having some big-time clients like Coinbase, Gemini, and FTX.
The collapse of Silvergate Bank was a classic bank run. The draining of deposits started from the collapse of Sam Bankman-Fried’s FTX exchange. At the end of September, Silvergate had a whopping $13.3 billion in deposits, with $1.9 billion in cash and $11.4 billion in investment securities.
But over the next few months, after FTX went down, deposits started dwindling fast. By the end of last year, they were down to $6.3 billion, and the bank had to sell off some of their securities to get more cash. Plus, rising interest rates meant that the value of their securities had gone down too. To make matters worse, folks were getting spooked and moving their funds to bigger banks for safety.
To sum up, Silvergate Bank’s failure was triggered by the withdrawal initiated by the fall of FTX, and their holdings could not fulfill the ongoing withdrawal request, leading to liquidation in the end.
The collapse of Silicon Valley Bank
So, let’s talk about Silicon Valley Bank. They were a more traditional bank that had been around for ages and weren’t really into the whole crypto thing. They had a great rep and were all about serving the tech industry in Silicon Valley.
Unfortunately, things took a turn for the worse and they ended up collapsing. There were a few factors at play here. For one, interest rates were going up, so the bank had to pay out more to keep people’s deposits. And since the VC investments were slowing down due to market sentiment, the bank wasn’t getting as many new deposits. Plus, they made the mistake of investing in long-term government bonds, which lost value when interest rates went up. And finally, they couldn’t call back a lot of their high-risk venture loans, which made it impossible for them to repay all the withdrawal requests.
It’s a shame to see a bank with such a good reputation go under like this.
Stablecoins depegged
Last year, there were a bunch of crypto incidents, and a lot of them started with the stablecoin sector. It all kicked off when TerraUSD collapsed in May, and things just went downhill from there.
One of the most significant things to come out of Silicon Valley Bank’s collapse was the impact it had on the USDC stablecoin, which is the second-most liquid U.S. dollar-pegged stablecoin out there.
USDC is supposed to be super stable, meaning its value shouldn’t fluctuate much. However, when SVB filed for bankruptcy, it was revealed that the bank held over $3.3 billion worth of deposits in USDC. This caused panic in the crypto world, where USDC temporarily lost its peg, fell below $0.87, and rebounded when the news came out that SVB depositors were going to be made whole. But man, what a ride.
Is Crypto to Blame?
Despite the big collapse of Silvergate Bank and Silicon Valley Bank, we can’t go around saying that cryptocurrency itself is a failure. That’s just not true. These banks went belly-up because they made some bad investments and couldn’t pay back their depositors. It’s as simple as that.
The collapse uncovered weaknesses in centralized financial systems, leading people and companies to seek alternative options. The drawbacks of these systems, including the possibility of single points of failure, inefficiencies, and mismanagement, can push individuals towards decentralized financial systems such as blockchain and cryptocurrencies.
Unlike centralized banking, blockchain offers increased security, transparency, and autonomy, making it a viable alternative. By harnessing blockchain’s inherent strengths, the financial industry can overcome its weaknesses, such as vulnerabilities, inefficiencies, and mismanagement, ultimately leading to a more innovative, resilient, and sustainable financial ecosystem.
The recent collapse of Silicon Valley Bank underscores the importance of adopting blockchain technology in the financial industry to avoid similar crises in the future. By utilizing the unique advantages of blockchain, we can create a more robust and reliable financial infrastructure that benefits individuals, businesses, and the global economy as a whole.
