Silicon Valley Bank (SVB) was a popular bank for venture capital and tech startups, with more than $342 billion in client assets.
It was once considered the go-to bank for startups and was widely known as the “startups bank.”
However, everything changed when it faced a sudden downfall in just 36 hours, leaving thousands of companies on the brink of collapse. The full extent of the economic damage is yet to be determined.
In this article, we’ll explore the reasons behind SVB’s downfall and discuss how Bitcoin could have potentially prevented this situation.
Silicon Valley Bank is a financial institution that caters to the technology and venture capital industries, with a particular focus on US-based startups.
In the past, the bank has invested heavily in safe assets such as US Treasuries, which proved successful in a low-interest-rate environment. However, when the Federal Reserve began raising interest rates last year, SVB made a risky bet that the pace of hikes would be slower than it turned out to be.
The bank invested $100 billion into government-backed bonds, locking them away for 3-4 years at an interest rate of 1.79%. Unfortunately, the Fed’s rapid rate hikes caused the value of SVB’s bonds to plummet. It’s important to note that SVB used its clients’ funds to make these risky investments.
Eventually, the bank had to sell the bonds at a loss to maintain liquidity. This loss became significant as SVB’s clients, primarily startups, started withdrawing more money to cover their expenses
In order to fulfill the withdrawal requests of their clients, SVB had to sell their bonds at a loss. To raise $2.25 billion, the company announced they would sell a third of their ownership on March 8. However, the following day, the bank’s stock plummeted by 60% after reports emerged about their insolvency problems. In response, the CEO contacted clients to reassure them that their funds were secur.
Also Read: Blockchain – The Success Factor For Your Business.
The problem with FDIC insurance:
FDIC insurance is a deposit insurance that safeguards depositors in the event of bank failure or insolvency. The coverage limit is $250,000 per account, but for SVB, a significant proportion of the accounts were for businesses with amounts exceeding that threshold.
Although there is a chance that companies could recover some of their funds once assets are sold, the process could be prolonged, causing liquidity issues for these firms.
This is a pressing concern as the funds are crucial for business operations, including paying salaries and expenses. Businesses that had set aside cash for contingencies might now face the risk of closure due to their inability to access their funds.
How Could Bitcoin Have Prevented This?
Bitcoin operates on a decentralized system that does not rely on a central authority.
Instead, it utilizes a public ledger, the blockchain, to keep track of transactions, making it more transparent and secure than traditional banking systems.
It does not operate on a fractional reserve system, meaning there is no risk of banks taking bets on the Federal Reserve’s actions.
Furthermore, Bitcoin is a finite currency, making it less susceptible to inflation and devaluation. Unlike fiat currencies that are becoming worthless due to high inflation, Bitcoin has a limit on the number of Bitcoins that can be created.
With Bitcoin, there is no need to worry about FDIC insurance as it is not under a centralized authority. Instead, funds are stored in a digital wallet, giving the user complete control and eliminating the risk of bank failures or insolvency issues.
Having said that…
The failure of SVB has dealt a major blow to the technology industry and has put many companies in a precarious position. This incident has highlighted the issues with fractional reserve banking systems and FDIC insurance, and there is a need to reconsider our banking systems.
Bitcoin, with its decentralized structure and limited currency supply, may offer a solution to avoid another similar disaster like the one experienced by SVB.