The Gist

  • Domino effect? The FTX crypto exchange collapse is reverberating across banking.
  • Crypto bailout. Crypto-based banks are failing, and the US government is bailing them out.
  • CX/startups the benefactor? CX companies and other tech startups stand to benefit from the generous federal hand-outs.

The collapse of Silicon Valley Bank is sending reverberations throughout the banking industry and is exposing instability across the entire technology and banking startup ecosystem. But not to worry, the cavalry is on the way, as all losses will be covered, completely, far beyond the standard FDIC $250,000 limit to which the average American is beholden.

This is important to note as both SVB and Signature had a very high share of deposits above the guaranteed amount. In fact, 94% of SVB’s deposits and 90% of deposits at Signature exceeded the limit and were uninsured. For comparison, the average deposit for conventional large banks is half that percentage. Seems there is a lot of big money sitting in these smaller banks.

Nearly half of all US venture-backed startups kept cash with SVB, including crypto-friendly venture capital funds. FTX was a major customer of the cryptocurrency bank that started the meltdown contagion.

But how did we get here, and how did all the depositors at SVB come off with such a sweetheart deal, far beyond what the law required? What made the US government so generous?

And to be more targeted, how is this going to impact the customer experience industry, of which many vendors and startups used SVB? Will CX companies not just see benefits from this cash bonanza, but get any blowback from getting the bailouts, like seeing their funding lines dry up?

The Silicon Valley Bank Collapse Timeline: A Brief Overview

On March 8, Silvergate Capital, a cryptocurrency bank, announced it would wind-down its operations and liquidate its assets after a bank run. Bankrupt crypto exchange FTX was a major Silvergate customer. After this event, Silicon Valley Bank told investors they needed to raise $2 billion in capital, as it was forced to sell a bond portfolio at a $1.8 billion loss to generate cash.

In a letter to customers, Greg Becker, CEO of Silicon Valley Bank, said the bank had the “financial position to weather sustained market pressures.” On March 9, a Silicon Valley Bank executive wrote that the bank was “actually quite sound, and it’s disappointing to see so many smart investors tweet otherwise.” Fantastic, sounds like there was nothing to worry about. Unfortunately, that was not true as SVB saw its stock drop 60% that day as more customers withdrew their money.

On March 10, Silicon Valley Bank, the 16th-largest bank in the country, and one of the largest banks for technology startup businesses like CX vendors, collapsed. Not a few hours later, regulators took it over, and named the FDIC as the receiver. This was the largest banking crash since the 2008 financial crisis and resulting Great Recession.

The failure of the 40-year-old company put $175 billion in customer deposits under the regulator’s control. Wow! That’s billion with a capital “B.” Just two days later, in order to supposedly prevent the spread of banking contagion, regulators seized Signature Bank, another who has also seen a run of withdrawals. Signature, just like SVB, was crypto-based.

Former United States Representative Barney Frank, who helped write the 2008 banking laws, and now sits on the board of crypto-based Signature, said there was “no real objective reason” that Signature had to be seized.

“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” he said. “We became the poster boy because there was no insolvency based on the fundamentals.”

So, wait one sec, how is bailing out crypto companies and their banks sending a strong anti-crypto message? What is that message exactly? That you can gamble as recklessly as you want and we will be here to bail you out?

Apparently, yes. The Federal Reserve, the Treasury Department and the F.D.I.C. announced jointly that “depositors will have access to all of their money starting Monday, March 13" and that no losses from either bank’s failure “will be borne by the taxpayer.”

That will be amazing, if true. While the claim is that banks will pay for this, the reality is they will probably just pass the cost onto their customers through higher service fees.

Learning Opportunities

On March 15, the Dow dropped 300 points due to the crisis. Blackrock CEO Larry Fink warned the failures could simply be the first “domino[es] to drop” before a potential “cascade throughout the US regional banking sector with more seizures and shutdowns coming.”

Related Article: Show Me the Money — and Digital Experience: Bank Websites Get UX Test

Fallout for CX Companies and Tech Startups: Access to Capital at Risk

If one looks at the SVB and Signature bank bailouts, it seems primarily intended to shore up confidence in the crypto market, after the dismal collapse of FTX and failure of federal regulators to spot or do anything about it. The cover story for this handout is to allow struggling startup companies to pay their employees, but there is little evidence to support that. Billionaire investor Peter Thiel had $50 million in SVB before collapse, he will be made whole. No gambling here.

Luckily for a lot of other startups and tech firms, the government's generosity will be felt immediately. Technology vendors who had money with SVB include Airbnb, Tesla and Uber. Customer experience technology providers who were impacted include Indeed, Zoom, Twilio, and Snowflake. Some others include Atlassian, Box, DocuSign, Dropbox, GitHub, Nutanix, Slack and SurveyMonkey.

The Long-Term Implications of the Banking Bailout: Regulation and Investment

The bigger long-term fear for CX companies and other technology startups are the gaps currently widening between Wall Street and Silicon Valley. Long under-regulated, Silicon Valley has had several decades of nearly unlimited revenue and profit from next to zero legislation, allowing them to upend industries who were beholden to federal and state government regulations. Uber is an excellent example of this.

The potential fallout here is that this may cause money for CX and other technology startups to dry up some. This is the problem of mixing speculative crypto money with money from actual investments with some substance. If the crypto stuff fails, which it will, it will bring down the rest of the startup ecosystem.

Related Article: Cryptocurrency and Bitcoin: Beware the Pitfalls

Wall Street, Silicon Valley and the Future of Startup Funding

This collapse should hopefully put more scrutiny and oversight on how the private equity community raises investment capital, making more clear lines of demarcation between shady crypto money and legitimate investor funds.

Overall, the technology startup space needs easy access to capital to grow. This series of events may make that money harder to get with more hoops to jump through. Or, the government will just bail them out, like in 2008, with little oversight, and just look the other way while reckless speculation continues.