Lessons From the Silicon Valley Bank Collapse: The Potential of Decentralized Markets for a More Secure and Equitable Financial System

Introduction

The collapse of the Silicon Valley Bank (SVB) at March 10, 2023 came as a surprise to many around the world. Being the biggest bank failure in the US since the recession of 2008, the SVB collapse rang the alarm at many governments and other financial institutions. Despite assurance from policymakers that no other banks were at risk of toppling down with SVB, many bank stocks have decreased since, and this has not limited itself to the US. The ensuing unrest has prompted experts and users of crypto to emphasize the need for a decentralized financial system, without a single point of failure such as a bank. 

In this article, we will analyze the impact of the SVB collapse on financial markets, and whether or not it is true that these problems might not have been problems at all had there been a decentralized financial system in place.

The Silicon Valley Bank collapse

A little bit of background

Silicon Valley Bank was founded almost 40 years ago, in October 1983, mainly to focus on fulfilling the financial needs of startup companies. During its lifetime, SVB became the biggest bank in Silicon Valley by deposits, preferred by almost half of all venture-backed tech startups. 

However, following the high inflation rates from 2021 to 2023, the bank experienced a bank run on its deposits in March 2023, eventually leading to its collapse.

Why did SVB collapse?

SVB’s problem originated from the flourishing tech sector during the years of the COVID pandemic. During the worldwide lockdowns, many tech companies such as Windows and Google saw their money doubled, as did many of SVB’s clients. The bank put this money in long-term investments such as government bonds, that are usually quite stable and safe. However, when interest rates increased due to the high inflation rates of the last two years, those investments turned out to be a lot riskier than anticipated, with their value decreasing significantly.

At the same time, tech companies experienced a decline in their profits, prompting them to withdraw funds from their accounts at SVB. To meet these withdrawal demands, SVB was forced to sell their investments at a loss. Once clients became aware of this situation, a considerable number of them sought to withdraw their funds from their bank accounts, culminating in a classic illustration of a bank run.

Lack of sufficient regulation

The abruptness of SVB’s collapse raises questions regarding the regulatory oversight that failed to detect the bank’s precarious financial position, especially since, following the 2008 financial crisis, the US implemented more rigorous supervisory measures for its banks. However, under the Trump Administration, certain aspects of these measures were rescinded, particularly for smaller banks such as Silicon Valley Bank. Consequently, SVB’s clients were not aware of the dire situation of their bank either.

Vulnerabilities of a centralized financial system

The collapse of Silicon Valley Bank is the latest in a series of events that illustrate the vulnerability of our traditional financial system, which revolves around central entities such as banks and exchanges. This has prompted crypto experts to point out the benefits of a decentralized system. In this section, we will discuss how the SVB collapse highlights the vulnerabilities of traditional financial systems, and how these vulnerabilities are tackled in a decentralized system.

Transparency and relying on third parties

As explained before, the abruptness of the SVB collapse was likely due to inadequate regulatory oversight and a notable lack of transparency. Only the information that SVB and regulators deemed necessary for the public to know was reported.

The risk of having to rely on a third party, especially if that third party is not transparent, is one of the main reasons behind the development of Bitcoin after the bank collapses of 2008. Decentralized networks eliminate the need for trusting in a central third party. People do not have to rely on someone else to manage their money in ways that they might not even be fully aware of.

Additionally, everyone can view the ledger on a blockchain network, which allows for full transparency regarding transactions.

Single point of failure

Another critique on the traditional financial system illustrated by the SVB collapse, is that central systems are vulnerable because they have a single point of failure, usually a bank. In case of the SVB collapse, their failure did not only hit their clients and the US, but also affected bank stocks on other continents, due to the unrest stemming from the fear that more banks might be in bad financial conditions without people knowing. 

A decentralized network does not have this vulnerability. Since there is no central point of control or single entity responsible for the network’s operations, a decentralized network is resistant to attacks and failures. Even if some nodes in the network go offline or become compromised, the network can still continue to function and process transactions as long as a sufficient number of nodes remain operational.

Conclusion

In conclusion, the collapse of Silicon Valley Bank (SVB) highlights the vulnerabilities of traditional financial systems, including the risks associated with relying on centralized entities and the lack of transparency that can result from third-party management. The collapse of SVB, the largest bank failure in the US since 2008, has demonstrated the potential for disruption to financial markets and the wider economy. However, the event has also drawn attention to the potential benefits of decentralized financial systems, which eliminate the need for a single point of control or failure. Decentralized networks, such as those utilized in cryptocurrency, offer transparency, resilience, and resistance to attacks and failures, making them a promising avenue for the development of a more robust and stable financial system. 

With the increasing awareness of these benefits, a shift towards decentralized markets may offer a pathway towards a more secure and equitable world.