On March 10, after days of uncertainty caused by $1.8 billion in Surprise Bond Losses, Silicon Valley Bank (SVB) collapsed, sending a tidal wave of ripple effects through the entire financial industry. The event quickly prompted the US Treasury, the Federal Reserve and the FDIC to intervene to disaster surrounds them and ensure depositors access to all their funds, whether or not they are insured.
While the situation is still unfolding, the apparent fiasco has left those in traditional finance shuddering at the memory of the 2008 financial crisis. However, the context of the collapse, that SVB was a significantly popular choice for venture capitalists and tech startups, has prompted more contemporary investors (such as those in Web3) to comment on the potential of decentralization to avoid central bank woes.
But still, in the days after the debacle, it became clear that the NFT space could have dodged a bullet with the help of regulators. Because while Web3 makes a strong claim to being decentralized, some of the most prominent players apparently narrowly escaped being caught up in the debacle.
What happened
How did the 16th largest bank in the United States become the second largest bank failure in US history? To summarize, the collapse came down to two main factors.
The first is that, in the last year, the Federal Reserve has raised the federal funds rate by almost five percentage points in an attempt to control inflation. These higher interest rates significantly undermined the value of long-term bonds that SVB and many other banks previously purchased when interest rates were close to zero.
The second factor refers to the rapid and extensive decline in technology revenue and risk capital experienced within the US. In response to the decline, startups had chosen to withdraw funds held at SVB, meaning the bank was facing significant unrealized losses on bonds while, at the same time, withdrawals from customers increased. This, in turn, caused a run on the bank where customers panicked and all tried to withdraw their money at once.
Just two days after the SVB shutdown, the Treasury Department, the Federal Reserve, and the FDIC released a joint declaration saying that “depositors will have access to all their money starting Monday March 13” and that any losses associated with the SVB resolution would come from taxpayers’ money.
The statement also mentioned that regulators took these unusual steps because SVB posed a significant risk to the US economy. As regulators continue to search for a SVB buyer and uncertainty about what comes next is growing, HSBC has acquired SVB UK for a symbolic pound.
Outside of the world of traditional finance, those in the blockchain industry are doing their best to understand how the situation could have, and still could, affect their playing fields.
Who could have been affected?
Not to be confused with the FTX crash, this latest three-letter acronym fiasco had a significantly less detrimental effect on the NFT space than the aforementioned failed crypto exchange. Thanks to the actions of the Federal Reserve and FDIC, the many accounts hosted at SVB, which included consumer accounts and high-profile business accounts like Roblox, Buzzfeed, Etsy, and more – were completed as of March 13.
But the fact is that the collapse of SVB could have very significantly affected the blockchain industry. Because apart from crypto companies like Avalanche, BlockFi, Ripple, Pantera, and others that had funds locked up in the SVB debacle, numerous NFT-adjacent entities would have also suffered greatly. Here are some examples.
Circle
One of the most immediate and impactful concerns stemmed from the release of the USDC stablecoin. USDC lost its 1/1 peg to the US dollar just hours after SVB closed, and Circle’s $3.3 billion of cash reserves (about eight percent of the funds backing the USDC) went into limbo. Although the situation has since been corrected, USDC is still not back at $1 parity like Signature Bank (another critical institution for USDC holdings) was seized following a similar bank run.
Proof
The Proof Collective, which has grown in popularity in recent years thanks to the success of projects like Moonbirds, Oddities and grails – became an immediate concern for the NFT community after the SVB news. Addressing the Proof community via Twitter, the project team confirmed that Proof had cash in SVB, although they did not say how much. Furthermore, they noted that they had diversified assets across ETH, stablecoins, and fiat money.
Azuki
When word first spread about SVB, many also looked to the popular PFP Azuki project (led by former big-tech entrepreneur Zagabond) to see if it was affected. However, Zagabond quickly allayed the concern, telling the project’s thousands of Discord members that SVB was just one of its many banking partners and that the bank held less than five percent of the project’s funds.
yuga laboratories
Members of the NFT community were also quick to raise concerns about Yuga Labs following the closure of SVB. However, like Azuki, the brand made it clear that the fiasco would not affect its business or plan in any way. Yuga founder Greg Solano announced via Discord that the company had “super limited financial exposure” to the situation.
Memeland
Memeland, the Web3 venture studio created by Hong Kong-based meme-focused entertainment website 9GAG, was similarly minimally affected by the SVB collapse. Taking to Twitter9GAG CEO and co-founder Ray Chan shared that Memeland only had about $40,000 in the bank, with no retirement plans. He went on to express his lack of concern about the fiasco as well, stating, “when SVB falls as fast as FTX did, crypto and NFT don’t seem as risky.”
What does all this mean for Web3?
It is no exaggeration to say that the implications of SVB’s closure could have been significantly worse had regulators not stepped in to guarantee deposits. Even considering the minimal exposure most major NFT players had to the bank, Web3 would surely have felt the ripples of the Circle situation alone, as USDC is a very popular stablecoin for those in the NFT space.
However, some key takeaways have emerged in response to the near-catastrophic experience. The most prominent of which has a lot to do with the already widely accepted Web3 ethos: decentralization. Of course, this goes well beyond advocating decentralization and keeping funds out of the core banking system (as many already do). Because the main lesson learned from the SVB fiasco is that in order to mitigate crypto and NFT risk, users should not keep all their assets in one place.
Native NFT users have surely heard this warning time and time again. In addition to following Web3 security best practices, locking assets for safekeeping or simply spreading assets across multiple secure wallets and accounts could help mitigate risk significantly.
So the adage goes: don’t put all your eggs in one basket.
