Only slowly picking itself from the impact of the FTX scandal, the world got hit with news of the largest financial crisis since the global financial crisis in 2008. The renowned Silicon Valley bank was shut down by the government. Shortly after news of the bank’s failure broke, the stablecoin USDC fell rapidly to a record low. The report – shocking and scary – made several investors worldwide re-analyze the sense in uninsured deposits. The question on everyone’s lips is why the bank collapsed and why such a collapse affected the USDC – a stablecoin.
What Happened to the Silicon Valley Bank and Why is the USDC affected
On the 10th of March, stakeholders were slammed with the failure of Silicon Valley Bank that occurred at an alarming speed. Silicon Valley Bank is one of the leading lenders in the world, with high deposits and even higher stakes.
Many have queried the reasons for the disaster – remarkably, one of the largest in over a decade. One can trace the failure first to the saving and collection of uninsured funds by customers and the SVB, respectively. These funds were considered uninsured because they exceeded the $250,000 insured by the federal government. The bank reinvested the money deposited in bonds while retaining only a bit in cash.
These bond investments seemed the right choice; they generated fixed returns and were excellent for business, provided their interest rates remained modest and low. However, the United States government, looking to offset the inflation that has recently plagued the country, kicked up the interest rates, and this meant an increase in the rates of the vast bonds that the bank had with it.
Additionally, there has been a downward funding spiral for tech startups, many of whom are SVB’s clients. This spiral meant lower deposits and increased withdrawals. SVB also had to deal with massive withdrawals from uninsured accounts. These factors meant that the bank had to deal with rapid amounts of leaves within a short period. It was further worsened by the initial panic withdrawal, which many of its customers did after SVB published news of its dire situation before its closure.
Why Did the Silicon Valley Collapse Affect the USDC
The USDC is a stablecoin with a constant value. However, following the Silicon Valley saga, the value of the con crashed to an all-time low of $0.885. This loss is surprising but not unexpected as the coin’s mother company, Circle had $3.3 billion in the Silicon Valley Bank reserves. The USDC, which is to mirror the dollar at a fixed value of $1.1, crashed severely with the rest of the Silicon Valley Bank. When news got out that the USDC was intricately linked with SVB, USDC withdrawal spiked and the value dropped so much that the company in charge of the coin could not keep up with the increased demand.
Conclusion
The Silicon Valley Bank Collapse effects are not short of glaring to the world. Many stakeholders are reluctant to trust financial institutions, and others are stuck in financial sinking sand with considerable debts to settle. Although the Circle has assured the public that it will continue to run its activities as usual, there is no telling if it can get back its funds from SVB and move to its position before the collapse.
