Distressed crypto lending firm BlockFi filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of New Jersey. The decision to file for bankruptcy by the firm after the sudden crash of FTX, which was one of the largest crypto exchange platforms then.
BlockFi declared bankruptcy on 28 November 2022. The firm was already under a liquidity crisis after the collapse of crypto hedge fund Three Arrows Capital but the sudden filing for bankruptcy was triggered by the crash of FTX in early November.
According to the bankruptcy filing by BlaockFi, the firm has around $227 million worth of uninsured funds which is allocated to a money market mutual fund (MMMF) which is offered by Silicon Valley Bank, which is already going through a rough phase.
The Silicon Valley Bank (SVB) is one of the largest banks in the United States and the bank is also known for its partnership with key venture-based companies.
One of the largest banks in the United States, the Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation (DFPI). The bank ceased operations on March 10. Not many details about the closing of the bank were provided at the time of closing.
The shutting down of the Silicon Valley Bank can be seen in connection with the events that took place at Silvergate Capital. The crypto-focused bank stated that they were planning to wind up their operations and also to liquidate voluntarily after the firm was hit hard by the fall of crypto exchange firm FTX.
The bankruptcy case filed by BlockFi is ongoing and as per the information available from a filing made on March 10, BlockFi has almost $227 million worth of capital in an MMMF offered by the already distressed Silicon Valley Bank.
The filing mainly features a balance summary statement which is issued by the Silicon Valley Bank that says that the investment by BlockFi is not a Federal Deposit Insurance Corporation (FDIC) insured one nor insured by any federal government agency and that it was also not guaranteed by the bank.
The standard deposit insurance amount by the FDIC is around $250,000 per depositor, however, it does not cover the area of money market mutual funds.
A money market fund is a form of a mutual fund. Through a money market mutual fund investments are made in highly liquid, near-term instruments. These instruments can be cash, cash equivalent securities, or any such.
Also, the money market mutual fund is regulated by the United States Securities and Exchange Commission. The investors will be issued fund shares in exchange for their capital. So, it is speculated that the fund of BlockFi is not affected by the issues that the Silicon Valley Bank is going through.
While being a fully functional firm, Silicon Valley Bank offered different types of mutual fund investment services for their customers. Even though the firm offered different services, the official website of the bank suggests that the bank has not handled or managed any of them by itself.
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Looking at the details provided by the bank, big names like BlackRock, West Asset Management, and Morgan Stanley are listed as fund managers for the bank. So, the fate of the investment by BlockFi is likely to be affected only by the performance of the fund and not by the financial woes of the Silicon Valley Bank.
While it is somewhat clear that the issues faced by Silicon Valley Bank will not directly affect the fund of BlockFi, there are some other firms that might be directly impacted by the issues at Silicon Valley Bank. One such firm is the issuer of USD Coin, Circle. The Circle published its latest audit report on January 31, 2023.
As per the information shared through their audit report around $8.6 billion which is almost 20% of the company’s reserves are held up in different financial institutions. These institutions that hold the receipt of Circle include firms like Silicon Valley Bank, Silvergate, and also Bank of New York Mellon.
Even though it is clear that the reserve value of Circle is held up in Silicon Valley Bank and Silvergate, the details regarding the exact amount held up by the firms are not made public by Circle.
After the news about Silicon Valley Bank became a discussion, Circle made an official statement through their Twitter account regarding their stand on the issue.
Through the statement, Circle made it clear that Silicon Valley Bank was one of the six banking partners that manage the approximately 25% apportion of their reserves held by USDC in cash.
The company also added that they will continue to ‘operate normally’ as the company awaits ‘clarity on how the FDIC receivership of SVB will impact its depositors.’
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