If SVB can go bust, any crypto exchange can, warns Nouriel Roubini who predicted Great Financial Crisis

If Silicon Valley Bank (SVB) can go bust in one day, any exchange or financial scheme in the crypto space can go bust faster, noted economist Nouriel Roubini warned on Saturday. SVB, the 16th largest bank in the US, collapsed in just 48 hours after it tried to raise $2.25 billion to plug a loss caused by the sale of assets, mainly government bonds.

The bank, the key lender for tech startups, had run out of liquidity. Its clients (start-ups) had started withdrawing money as funding had stopped from Venture Capitals due to fears of recession. The bank had to sell the government securities at a loss as their value had declined due to high-interest rates.

Roubini, who had predicted the Great Financial Crisis in 2008, said the crypto exchanges were like banks with massive maturity mismatches and shoddy assets. The crypto exchanges, he added, don't have the liquidity, capital, deposit insurance, and LOLR (Lender of Last Resort) option of real banks. "So cryptosystem in on its way to systemic meltdown," he warned.

Roubini, also known as 'Dr Doom', has been warning investors against buying into crypto which he calls a 'scam'. In January this year, he said literally 99 per cent of crypto is a scam. "A criminal activity. A total real-bubble Ponzi scheme that is going bust," he said while speaking to Yahoo Finance.

He had also said that crypto exchange FTX and its founder Sam Bankman-Fried (SBF) were not an exception — "they're a rule". Founded in 2019, FTX west bust in November last year.

However, some experts say SVB is not a fraud case like FTX and that startups should not panic. There is obvious panic around the sudden collapse of the bank but several startups, which had huge exposure to the bank, could successfully migrate their funds to other banks or neo-banks in time.

Vivek Khandelwal, Founder of iZooto, told Business Today that most companies in the B2B SaaS space have SVB accounts and a lot of them could move a chunk of our funds after Thursday night's tanking of the stock had triggered enough panic.

Amarpreet Kalkat, founder & CEO of Humantic AI, said his California-headquartered startup could successfully pull out funds from SVB. He said his first thought was to support SVB, thinking this would pass but the next thought was that he had a bigger responsibility to 20 people whose livelihood was at stake, and the customers and the investors. "Next two hours were spent in finding a way to transfer the money out (we didn’t have millions but it was still well above the FDIC limit)," he said in a series of tweets.

On Friday, California's financial regulator - the Department of Financial Protection and Innovation or DFPI - took control of SVB, citing "inadequate liquidity and insolvency". The SVB is a state-chartered commercial bank based in Santa Clara and is a member of the Federal Reserve System, with total assets of approximately $209 billion and total deposits of approximately $175.4 billion as of December 31, 2022.

The collapse saga began on March 8 when the bank announced a loss of approximately $1.8 billion from a sale of investments (US treasuries and mortgage-backed securities). The same day, the bank’s holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank, causing a run on the bank.

As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million, the California regulator said in its possession order. "Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve." The regulator said the precipitous deposit withdrawal caused the bank to be incapable of paying its obligations as they came due, and the bank was now insolvent.