Silicon Valley bank collapse sparks blame game between crypto and tech

SAN FRANCISCO — For once, the crisis didn’t seem to revolve around a cryptocurrency company.

The sudden collapse of Silicon Valley Bank on Friday sent panic to the tech industry. But crypto executives and investors — who have endured a year of near-constant upheaval — seized the moment to preach and scold.

Centralized banking was to blame, crypto advocates said. Their vision of an alternative financial system, independent of big banks and other gatekeepers, was better. They argued that government regulators who have recently cracked down on crypto firms have sown the seeds for the bank’s implosion.

“Fiat is fragile” writing Bitcoin lawyer Erik Voorhees, using a common shorthand for traditional currencies.

“We are seeing issues in the machine,” said Mo Shaikh, chief executive of crypto firm Aptos Labs. “This is an opportunity to catch your breath and consider the practicalities of decentralization.”

But the tone quickly changed, as a major crypto firm revealed Friday night that it had billions of dollars trapped in Silicon Valley Bank. A so-called stablecoin designed to maintain a constant value of $1 suddenly dropped in price, sending the market shaking.

And the pointing finger went both ways. Some tech investors have argued that the trail of bad actors and overnight meltdowns in the crypto world have conditioned people to panic at the first sign of trouble, setting the stage for the crisis at Silicon Valley Bank. In November, FTX, the crypto exchange run by Sam Bankman-Fried, went out of business after the crypto equivalent of a bank exposed a huge hole in its accounts.

“It’s the recognition that too many people have,” said Joe Marchese, an investor at venture capital firm Human Ventures.

The blame game is a sign of factionalism in the tech industry, where startups and hot trends come and go and crises can be used to advance agendas. As Silicon Valley Bank imploded, crypto advocates blamed the structures of the traditional financial system for sowing instability. Some venture capitalists blamed the social media panic that sparked the bank run. Others blamed the government for its economic policies, or the bank itself for its mismanagement and miscommunication.

The debate comes after a tumultuous year for tech companies in which the crypto industry entered a months-long slump and some of Silicon Valley’s biggest companies carried out mass layoffs.

“People are just traumatized. They are in financial shock,” said Sam Kazemian, the founder of the Frax crypto project. “As soon as you see something, you wonder if there is fire there because it smells of smoke. And then you treat it like it’s all burnt out and get out while you still can.

Silicon Valley Bank began to falter on Wednesday when it revealed it had lost nearly $2 billion and announced it would sell assets to meet demand for withdrawals. The news struck fear in the tech industry, as start-ups rushed to withdraw their money.

As often happens in bank runs, these concerns have become a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corporation announced it was taking control of Silicon Valley Bank, marking the biggest bank failure since the 2008 financial crisis. Tech companies with money on deposit in the bank rushed to pay employees and suppliers.

Silicon Valley Bank was in “sound financial condition prior to March 9,” according to an order from the California Department of Financial Protection and Innovation. He became insolvent after investors and depositors caused a run on his holdings, the order said.

Silicon Valley Bank seems to have had a relatively small footprint in the crypto industry. Historically, many large banks have resisted working with crypto companies, given the legal uncertainty surrounding much of the business.

“A lot of crypto start-ups have had a really hard time fitting into Silicon Valley Bank,” said Haseeb Qureshi, a crypto investor at venture capital firm Dragonfly. “So our exposure is much lower than we had anticipated.”

There was at least one notable exception. Circle, a company that issues stablecoins, a kingpin of crypto trading, keeps some of its cash reserves at Silicon Valley Bank, according to its financial statements.

After a day of rampant speculation over the extent of Circle’s exposure, the company revealed late Friday that $3.3 billion of its $40 billion in reserves remained at Silicon Valley Bank. “Transfers initiated on Thursday to clear balances have not yet been processed,” Circle said. said in a statement on Twitter.

Unlike other volatile cryptocurrencies, stablecoins are meant to remain pegged at a price of $1. Uncertainty around Circle sent the price of its popular stablecoin, USDC, crashing below $1 in Friday and Saturday trading, raising fears of another crypto industry meltdown. On Friday evening, the crypto exchange giant Coinbase interrupted conversions between USDC and US dollars, citing market volatility.

As the crisis simmered, however, crypto advocates treated the collapse of Silicon Valley Bank as a chance to make the case they’ve made since the 2008 banking crisis. This upheaval showed that systems financial institutions were too centralized, they said, which helped inspire the creation of Bitcoin.

“Centralized entities are more opaque,” said Brad Nickel, who hosts the “Mission: DeFi” crypto podcast. “If cryptocurrency powered the financial rails of our world, then a lot of things might not happen or would be much less serious.”

But the race for Silicon Valley also followed a playbook reminiscent of the crises that erupted in the crypto industry last year, culminating in the implosion of FTX.

Crypto industry critics have argued that a crypto-centric version of the Silicon Valley Bank failure would have been worse for everyone.

“If it was an unregulated crypto bank, the money could just disappear,” Marchese said. The fact that the FDIC stepped in to handle the situation in an orderly mannershowed that “the system is working,” he said.

In the coming days, the FDIC will reimburse the bank’s depositors up to $250,000 while overseeing a process to recover lost funds. “There is no crypto regulator insuring accounts for $250,000,” said Danny Moses, an investor at Moses Ventures known for his role in predicting the 2008 crash in “The Big Short.”

Other analysts have argued that Silicon Valley Bank made the crisis worse by announcing its financial losses shortly after Silvergate Capital, a bank with close ties to the crypto industry, began winding down its operations last night. last week. They underline that Silicon Valley Bank’s way of communicating helped spark the panic that fueled the race.

“SVB’s deployment, for whatever reason, was poorly timed,” said Adam Sterling, deputy dean of Berkeley Law. “Everyone was already restless after the Silvergate collapse.”