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Silicon Valley Bank’s failure has a lot to do with rising interest rates, but the shockwaves from its demise will still be felt in the crypto industry.
Silicon Valley Bank, or SVB, was the bank of choice for 44% of U.S. venture-backed tech companies. But as venture capital dried up during the tech sector’s slump, startups have had to increasingly draw on their deposits at the bank to buy themselves more runway. And that's when SVB ran into capital troubles.
As the Federal Reserve kept raising interest rates, the value of SVB’s treasury bonds fell.
“High level SVB was actually being conservative and acquired U.S. Treasuries and held them on their books, both long-term and short-term,” Fresco Capital managing partner Stephen Forte told Decrypt.
That wouldn’t have been a problem if the bank, already running low on capital, hadn’t been forced to realize its loss on the treasury bonds.
“The narrative on Twitter led to a bank run and then when you have to sell those treasuries at a loss, well it all comes down,” he said.
After rumors that the bank was seeking a buyer, SVB customers initiated $42 billion in withdrawals on Thursday. On Friday morning, the Nasdaq halted trading of the bank's shares (SIVB) and SVB was ordered to cease operations by California state banking regulators.
The Federal Deposit Insurance Corporation, which was appointed as SVB’s receiver, said in a press release that insured depositors with less than $250,000 in SVB accounts will have “full access” to their funds no later than Monday, March 13. The rest—and there’s a lot, considering SVB had approximately $209 billion in total assets at the end of 2022—will have to wait.
After a decade of running three different venture-backed startups, Shipyard CEO Mark Lurie said this is the worst outlook he’s ever seen for raising capital.
“I’ve been doing this since 2012. This has been the toughest environment,” Lurie told Decrypt on Friday. “Late winter, I think median valuations were around $35 million. And as of a few weeks ago, it was up to $50 million. I think it’s probably going to go back down.”
Shipyard is the software company behind decentralized crypto exchange Clipper, which operates on Ethereum, Optimism, Polygon, Moonbeam and Arbitrum. The company itself didn’t have funds in an account at Silicon Valley Bank, which was abruptly shuttered by California state banking regulators on Friday.
Lurie’s worry stems from the fact that many of the venture capital funds and liquidity providers who Shipyard and other tech startups rely on were SVB customers.
“Being put into receivership doesn’t mean no one’s gonna get their money back. It’s different than a bankruptcy. It’s not like SVB doesn’t have assets,” Lurie said, but there are no clear answers on how long it’ll take for customers to get their money. “It’s not like people are going to get pennies on the dollar, but it could be years from now that they get their money back.”
If it sounds like Silicon Valley Bank’s failure, the largest FDIC-insured bank to fail since 2008, is a blow that will rattle the banking and tech sectors at large, rather than just crypto companies, that’s because it is.
It hasn’t always seemed that way, though. On Wednesday, crypto-friendly bank Silvergate was the first to fall and some lawmakers jumped on the chance to blame the crypto industry for banks struggling in the face of rising interest rates.
Sen. Elizabeth Warren (D-MA) has been keen to figure out whether Silvergate bears any responsibility for the loss of FTX customer funds since December. She said in a press release that the bank’s involvement with FTX, which was a client, “appears to be an egregious failure of [its] responsibility to monitor for and report suspicious financial activity carried out by its clients.”
On Tuesday, White House Press Secretary Karine Jean-Pierre got the ball rolling by saying Silvergate is “the latest company in the cryptocurrency field to experience significant issues” during a press briefing.
The next day Warren called Silvergate’s failure disappointing, but predictable on Twitter. “I warned of Silvergate’s risky, if not illegal, activity—and identified severe due diligence failures,” she wrote. “Now customers must be made whole & regulators should step up against crypto risk.”
So by the time SVB started to show signs of trouble, there was already a lot of momentum behind the idea that banks with connections to crypto were struggling.
“They might bank some startups that are somewhat into crypto, but they're not a big part of the crypto market infrastructure,” Keyrock CEO Kevin De Patoul told Decrypt. “So for me, it's a completely, completely different story.”
Keyrock, a Brussels-based crypto market maker and liquidity provider, has had to make some operational changes in how it moves U.S. dollars without the Silvergate Exchange Network, or SEN. Besides Signature Bank’s Signet service, it was the only other way for crypto-friendly companies to instantly settle large transactions with other institutions.
“The second impact, which is in my view somewhat unfair, is that this is labeled a crypto failure,” he said. “Of course, I’m not privy to their books, but the more I read into it, the more it seems that this is just a failure of a bank that also facilitated crypto transfers.”
But it’s still true that the SVB and Silvergate failures have left at least some crypto companies wondering where to bank or how to make payroll.
Y Combinator president and CEO Garry Tan said on Twitter that 30% of the famous Silicon Valley incubator’s portfolio companies banked at SVB and won’t be able to make payroll in the next 30 days.
30% of YC companies exposed through SVB can’t make payroll in the next 30 days.
If you or your company are affected, I recommend that you reach out to your local congressman to get this on their radar TODAY.
— Garry Tan 陈嘉兴 (@garrytan) March 10, 2023
“This is an extinction level event for startups and will set startups and innovation back by 10 years or more,” he wrote.
Protocol Labs, the research and development company behind Filecoin and InterPlanetary File System, sent an email to its portfolio company founders on Friday suggesting a few options.
“It is unclear what the larger fallout from this will be in terms of VC investment and the macro impact,” the company wrote in an email shared with Decrypt. “This and FTX reinforce the importance of diversifying your assets and banking/investment partners.”
There could be trouble for USD Coin issuer Circle, though. Just last week, the company announced that it cut ties with Silvergate Bank, and said that USDC minting and redemptions were fully operational.
The company said in its January cash reserve attestation, released earlier this month, that it holds a portion of the reserves backing $43 billion worth 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.”