Silicon Valley Bank was in “sound financial condition prior to March 9,” according to an order from California’s Department of Financial Protection and Innovation. It became insolvent after investors and depositors caused a run on its holdings, the order said.
Silicon Valley Bank appears to have had a relatively small footprint in the crypto industry. Historically, many large banks have resisted working with crypto companies, given the legal uncertainty surrounding much of the business.
“A lot of crypto start-ups had a very hard time onboarding onto Silicon Valley Bank,” said Haseeb Qureshi, a crypto investor at the venture capital firm Dragonfly. “So our exposure is a lot less than we anticipated.”
There was at least one notable exception. Circle, a company that issues stablecoins, a linchpin in crypto trading, keeps a portion of its cash reserves at Silicon Valley Bank, according to its financial statements.
After a day of frantic speculation about the extent of Circle’s exposure, the company revealed late Friday that $3.3 billion of its $40 billion reserves remained at Silicon Valley Bank. “Wires initiated on Thursday to remove balances were not yet processed,” Circle said in a statement on Twitter.
Unlike other volatile cryptocurrencies, stablecoins are supposed to stay pegged at a price of $1. The uncertainty around Circle caused the price of its popular stablecoin, USDC, to plummet below $1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. On Friday evening, the giant crypto exchange Coinbase halted conversions between USDC and U.S. dollars, citing the volatility in the market.
As the crisis brewed, though, crypto advocates treated the collapse of Silicon Valley Bank as a chance to press arguments they have been making since the 2008 banking crisis. That upheaval showed financial systems were too centralized, they said, which helped inspire the creation of Bitcoin.
“Centralized entities are more opaque,” said Brad Nickel, who hosts the crypto podcast “Mission:DeFi.” “If cryptocurrency were powering the financial rails of our world, then a lot of things might not happen or would be a lot less severe.”
But the run on Silicon Valley also followed a playbook that was reminiscent of crises that erupted last year in the crypto industry, culminating in the implosion of FTX.
Critics of the crypto industry argued that a crypto-centric version of Silicon Valley Bank’s failure would have ended worse for everyone.
“If this was an unregulated crypto bank, then the money could just disappear,” Mr. Marchese said. The fact that the F.D.I.C. stepped in to handle the situation in an orderly fashion showed “the system is working,” he said.