Hello Fintech Friends,

Last week, two competitors - bank land and crypto land - experienced a rare interplay, where significant developments in one caused seismic events in the other. In this post, we discuss the failure of the now infamous three S's: Silvergate Bank, Silicon Valley Bank, and Signature Bank. We provide a quick roundup of what happened, the far-reaching impacts on the financial and cryptocurrency sectors, and the sobering lessons that can be learned from this debacle.

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1. Silvergate Bank

Silvergate Bank was founded in California in 1988 as a state-chartered bank and a Federal Reserve member focusing on real estate. Around 2013, the bank started providing services to crypto companies, priding itself as “the leading provider of innovative financial infrastructure solutions and services for the digital asset industry,” unaware at the time that the source of its pride would also be the source of its demise. Silvergate was innovative. It launched its in-house settlement tool, the Silvergate Exchange Network, and sought to issue its own stablecoin by acquiring Meta's Diem Association in 2022. The bank’s troubles started with the fall of FTX in late 2022, even though the bank announced that it was not a creditor of FTX and only held FTX’s deposits. In 2023, Silvergate was facing backlash from lawmakers and saw its stock tank to below $20 (from a previous high of $220 in November 2021). On March 2, the bank announced that it would delay its annual 10-K disclosure, triggering a wave of withdrawals of deposits. Then, on March 8, the bank’s holding company said that it will wind down its operations and liquidate the bank.

What went wrong? Too much exposure to a single sector, the crypto industry, which has been going through a harsh winter since the Federal Reserve (Fed) started hiking interest rates.

2. Silicon Valley Bank

Silicon Valley Bank (SVB) was also a state-chartered bank, founded in 1983 in Santa Clara, California. It quickly became the bank for Silicon Valley startups, branding itself as the “[t]he financial partner of the innovation economy” (this was not the reason for its demise). In 2021, SVB’s total deposits grew by 86%, reaching almost $200B on March 31, 2022, which made it the 16^th largest bank in the U.S. and the largest bank by deposits in Silicon Valley. In 2022, SVB banked “nearly half of all US venture-backed startups, and 44% of the US venture-backed technology and healthcare companies that went public in 2022 [were] SVB clients.”

What went wrong? SVB had invested heavily in a portfolio of long-term mortgage-backed securities (with over ten-year maturities) and U.S. bonds. With the recent interest rate hikes, the value of this portfolio sharply collapsed, but that was not enough to trigger a run. On March 8, the bank sold $21B worth of securities at a loss of almost $1.8B and announced that it needed to secure an additional $2.25B to meet withdrawal requests. A run ensued, and the rest is history.

The reverberations of SVB’s collapse, which was the second-largest bank failure in U.S. history, shook crypto land, causing Circle’s stablecoin USDC to lose its peg to the dollar, sending it as low as 87 cents on March 11. The de-pegging resulted from a $3.3B exposure to SVB (consisting of Circle’s cash deposits in SVB, which back Circle’s stablecoin). Soon enough, crypto exchange Coinbase and trading platform Robinhood paused redemptions of USDC.

3. Signature Bank

Signature Bank was founded in 2001 in New York as a state-chartered, full-service commercial bank. Unlike Silvergate Bank and SVB, Signature did not claim any specialty or competitive edge in any specific corridor, but, as of September 2022, about one quarter of the bank’s deposits were from crypto companies. In response to stock downgrades, the bank said last December that it would reduce its reliance on crypto deposits to around 15%. On March 10, depositors, frightened by a 25% collapse of the bank’s stock, started a run to take out their deposits. On Sunday, March 12, New York’s Department of Financial Services announced that it took possession of the bank, marking the third-largest bank failure in U.S. history.

What went wrong? Similar to Silvergate Bank, there was too much exposure to a single sector, crypto.

4. End of the Panic

On March 12, the Treasury, the Fed, and the Federal Deposit Insurance Corporation (FDIC) announced that all depositors of SVB and Signature Bank will be made whole, with no losses borne by the taxpayers. The Fed also announced the establishment of a temporary lending facility, i.e., a mechanism to extend Fed loans to banks, “to help assure banks have the ability to meet the needs of all their depositors.”

5. Sobering lessons

a. ALL stablecoins, like currencies and money market fund shares, are stable…until they are not.

b. Crypto’s very original goal was to dethrone banks. The irony is: crypto needs banks to be functional.

c. Some banks like crypto, but not as much as crypto needs banks.

d. Crypto firms will have a harder time finding institutions to bank with. They also face a dilemma. Relying on “crypto-friendly” banks can be harmful to crypto companies themselves, not to mention the adverse effects on the banks and the wider economy, because of excessive exposure to crypto.

e. Both banks and crypto are ultimately reliant on the full faith and credit of the U.S. government. No matter how transparent, well-managed, and prudent banks and financial crypto firms are, without direct or indirect assistance from a lender of last resort, they can simply vanish at any moment.

f. While “not your keys, not your crypto” remains true, another irony from the weekend is that investors exercising self-custody, who likely ran over the weekend to redeem their stablecoins, ended up being worse off than those whose funds were trapped by crypto exchanges. At the end of the day, no one is safe!

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See you next week!