Silicon Valley Bank has closed its doors after intervention by banking authorities. What has happened to one of the largest banks in the United States?
The closure of Silicon Valley Bank, a US bank based in California with more than $170.000 billion in deposits, has sparked fear in markets, including cryptocurrency markets.
Last Friday, US banking authorities detected liquidity problems in the bank, making the decision to close its doors. The intervention of the California Department of Financial Protection and Innovation has left Silicon Valley Bank in the hands of the Federal Deposit Insurance Corporation (FDIC) as a recipient.
Silicon Valley Bank had extensive relationships with technology companies, venture capitalists and healthcare startups that have been affected by the financial panic caused by the bank's closure.
The contagion has spread to the cryptocurrency industry, directly affecting the stablecoin USD Coin (USDC), the second largest stablecoin by market capitalization.
The relationship between USDC and Silicon Valley Bank
USDC, issued by Circle, lost its peg to the US dollar on Saturday, falling to $0,883 per unit, according to data from CoinMarketCap. Currently, USDC has approached its parity with the dollar again and is trading above $0,97 per token. USDC trading volume in the last 24 hours exceeds $9.000 billion, according to platform data.
Source: CoinMarketCap
On Twitter, Jeremy Allaire, co-founder and CEO of Circle, explained the relationship that the stablecoin shares with the American bank and the consequences generated by its closure.
In the post, Allaire acknowledges that USDC went through one of the moments of greatest uncertainty in its economy. The stablecoin issuer maintains 23% of USDC reserves, about $9.700 billion, in cash deposits in various banking institutions, Silicon Valley Bank among them. About $3.300 billion of USDC's cash reserves are deposited in Silicon Valley.
Thus, although USDC is based on the blockchain, it depends on the US banking system and its work schedules to carry out exchanges, so its liquidity operations have been affected, Allaire explained.
Silicon Valley Bank will open this Monday morning in the United States and Circle awaits reopening to resume USDC liquidity operations, reported the company's CEO. Circle began a withdrawal process of funds deposited in Silicon Valley Bank last Thursday, to transfer said assets to BNY Mellon, so the company is relying on the management and policies of the FDIC to settle the transfer operations it initiated before the suspension of the US bank.
“We understand that the FDIC is currently determining the status of transactions initiated prior to the applicable receivership cutoff times, and transfers initiated on Thursday may be processed on Monday.”
However, due to the insolvency of Silicon Valley Bank, it is also possible that the bank will not return 100% to deposit holders. In fact, CoinDesk noted that a statement from the FDIC explains that the department will give customers access to their insured funds this Monday, meaning they will be able to access up to the first $250.000 available in their accounts.
Circle claims to be prepared for the situation ahead, both to cover any shortfalls or holds with corporate funds to ensure USDC's parity with the dollar and to process the significant volume of withdrawals from the stablecoin. “Circle, as required by law under the stored value money transmission regulation, will support USDC and cover any shortfalls using corporate resources, involving external capital if necessary,” assured the company.
The fall of Silicon Valley Bank
The bankruptcy of Silicon Valley Bank is the second largest in US banking history since 2008, when Washington Mutual closed.
Specialists attribute the capital crisis facing the bank to several factors, including the aggressive monetary policy established by the United States Federal Reserve (FED) to control inflation. The FED has been announcing sharp increases in interest rates that have led banks to suffer unrealized losses and a decline in investment. The bank's clients, mostly technology startups, began withdrawing their deposits to take advantage of their available funds in the absence of venture capital, leading the bank to sell some of its assets at a loss to meet demand.
On the other hand, California state representative Katie Porter also attributes the approval of regulatory reform S. 2155, signed in 2018, following the bankruptcy of Silicon Valley Bank. According to the US representative, this reform allowed banks to take “reckless risks”.
Treasury Secretary Janet Yellen has ruled out a bailout and points to the acquisition and capitalization of Silicon Valley Bank by another entity.
Breaking news: The FED announces bank financing plan
The Federal Reserve has announced a $25.000 billion funding plan that will be aimed at mitigating risk and guaranteeing the deposits of clients of troubled banks. The news has caused a positive effect on the markets, boosting the recovery of the USDC parity with the dollar and the price of the main cryptocurrencies.
Following the announcement of this financing plan, Allaire highlighted the enthusiasm generated by the crucial measures the US government is taking to mitigate risk and guarantee the bank's deposits.
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