Silicon Valley Bank (SVB), a well-known financial institution catering to startups, venture capitalists, and tech firms, was recently shut down by banking regulators. This sudden collapse has caused shock waves across the tech sector and raised concerns about the stability of the banking industry.
In this article, we will look at the reasons behind the shut down of Silicon Valley Bank, its impact on the tech sector and the wider economy, and what it means for the future of finance.
The Reasons Behind the Collapse of Silicon Valley Bank
Silicon Valley Bank (SVB) was facing a sudden cash crunch and attempted to raise money by selling shares and then selling itself. However, these actions spooked investors and ultimately led to the bank’s downfall. Many companies and individuals with money in the bank moved to pull out their funds earlier in the week, which ironically contributed to the bank’s demise.
What Does it Mean for the Future of Finance?
The collapse of Silicon Valley Bank raises questions about the future of finance and the role of traditional banks in the digital age. With the rise of crypto and decentralised finance (DeFi) solutions, many are exploring alternative financial systems that do not rely on centralised trust.
SVB had a Moody’s credit rating of A just 3 days ago.— James Lavish (@jameslavish) March 10, 2023
Crypto, particularly Bitcoin, operates on the opposite of fractional reserve banking. It is based on the concept of distributed trust, which eliminates the need for a centralised authority. This concept is what makes crypto unique and different from traditional banking systems.
Long-term events such as the failure of SVB are seen as positive for the crypto industry as they reinforce the importance of decentralised trust.
The Impact on Crypto Assets
The failure of SVB is likely to have a mixed impact on the crypto industry. While some assets in crypto may be hurt by this, Bitcoin is expected to be helped.
Contagion Risk in Crypto and Tech
Many experts in the crypto industry believe that the risk of contagion from the traditional banking system is potentially more damaging to crypto and tech than the reverse. They argue that every time there has been an incident in crypto, it has not spilled over to the mainstream until recently with the failure of FTX.
FTX is different from other failures in the crypto world because it was a result of gambling away $8 to $10 billion and stealing it from customers. This is not a systemic risk from crypto but rather a massive theft.
Stablecoins and Silicon Valley Bank
The recent failure of SVB raises questions about the potential impact on stablecoin proponents and companies that have relationships with the bank. The real issue here is that people are leaving their money in bank deposits despite the average savings account rate being only 0.25% or 0.23%.
The failure of SVB is likely to have a mixed impact on the crypto industry, with some assets being hurt while others, such as Bitcoin, may be helped. The crypto industry, however, is not expected to spill over to the traditional financial system, as crypto operates on the concept of decentralised trust, which eliminates the need for a centralised authority.