For once, the crisis didn’t seem to revolve around a cryptocurrency company.
The sudden collapse of Silicon Valley Bank on Friday set off panic across the technology industry. But crypto executives and investors — who have endured a year of near-constant upheaval — seized on the moment to preach and scold.
Centralized banking was to blame, the crypto advocates said. Their vision of an alternate financial system, unmoored from big banks and other gatekeepers, was better. They argued that the government regulators that recently cracked down on crypto firms had sown the seeds of the bank’s implosion.
“Fiat is fragile,” wrote the Bitcoin advocate Erik Voorhees, using a common shorthand for traditional currencies.
“We’re seeing glitches in the machine,” said Mo Shaikh, chief executive of the crypto company Aptos Labs. “This is an opportunity to take a breath and consider the practicalities of decentralization.”
But the tone quickly shifted, as a major crypto company revealed late Friday that it had billions of dollars trapped in Silicon Valley Bank. A so-called stablecoin designed to maintain a constant value of US$1 suddenly dipped in price, sending shudders through the market.
And the finger-pointing went in both directions. Some tech investors argued that the crypto world’s procession of bad actors and overnight collapses had 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 run exposed an enormous hole in its accounts.
“That’s the pattern recognition too many have,” said Joe Marchese, an investor at the venture capital firm Human Ventures.
The blame game is a sign of the factionalism in the tech industry, where hot start-ups and 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 finance system for sowing instability. Some venture investors blamed the social media panic that touched off the bank run. Others blamed the government for its economic policies, or the bank itself for poor management and worse communication.
The debate is unfolding after a tumultuous year for tech companies in which the crypto industry entered a monthslong meltdown and some of the largest Silicon Valley firms conducted mass layoffs.
“People are just traumatized. They’re financially shellshocked,” said Sam Kazemian, the founder of the crypto project Frax. “As soon as you see something, you wonder if there’s fire over there because it smells like smoke. And then you treat it like everything is burning and get out while you still can.”
Silicon Valley Bank started wobbling on Wednesday, when it revealed that it had lost nearly US$2 billion and announced it would sell off assets to meet demand for withdrawals. The news set off fear in the tech industry, as start-ups rushed to get their money out.
As often happens in bank runs, those concerns became a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corporation announced that it was taking control of Silicon Valley Bank, marking the largest bank failure since the 2008 financial crisis. Tech companies with money deposited in the bank scrambled to pay employees and vendors.
Silicon Valley Bank was in “sound financial condition prior to March 9,” according to an order from California’s Department of Financial Protection and Innovation. It became insolvent after investors and depositors caused a run on its holdings, the order said.
Silicon Valley Bank appears 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 had a very hard time onboarding onto Silicon Valley Bank,” said Haseeb Qureshi, a crypto investor at the venture capital firm Dragonfly. “So our exposure is a lot less than we anticipated.”
There was at least one notable exception. Circle, a company that issues stablecoins, a linchpin in crypto trading, keeps a portion of its cash reserves at Silicon Valley Bank, according to its financial statements.
After a day of frantic speculation about the extent of Circle’s exposure, the company revealed late Friday that US$3.3 billion of its US$40 billion reserves remained at Silicon Valley Bank. “Wires initiated on Thursday to remove balances were not yet processed,” Circle said in a statement on Twitter.
Unlike other volatile cryptocurrencies, stablecoins are supposed to stay pegged at a price of US$1. The uncertainty around Circle caused the price of its popular stablecoin, USDC, to plummet below US$1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. On Friday evening, the giant crypto exchange Coinbase halted conversions between USDC and U.S. dollars, citing the volatility in the market.
As the crisis brewed, though, crypto advocates treated the collapse of Silicon Valley Bank as a chance to press arguments they have been making since the 2008 banking crisis. That upheaval showed financial systems were too centralized, they said, which helped inspire the creation of Bitcoin.
“Centralized entities are more opaque,” said Brad Nickel, who hosts the crypto podcast “Mission:DeFi.” “If cryptocurrency were powering the financial rails of our world, then a lot of things might not happen or would be a lot less severe.”
But the run on Silicon Valley also followed a playbook that was reminiscent of crises that erupted last year in the crypto industry, culminating in the implosion of FTX.
Critics of the crypto industry argued that a crypto-centric version of Silicon Valley Bank’s failure would have ended worse for everyone.
“If this was an unregulated crypto bank, then the money could just disappear,” Mr. Marchese said. The fact that the F.D.I.C. stepped in to handle the situation in an orderly fashion showed “the system is working,” he said.
In the coming days, the F.D.I.C. will refund the bank’s depositors up to US$250,000 while overseeing a process to recover the lost funds. “There’s no crypto regulator insuring accounts for $250,000,” said Danny Moses, an investor at Moses Ventures who is known for his role in predicting the 2008 crisis in “The Big Short.”
Other analysts argued that Silicon Valley Bank had worsened the crisis by announcing its financial losses shortly after Silvergate Capital, a bank with close ties to the crypto industry, started winding down its operations this past week. They pointed out that the manner of Silicon Valley Bank’s communication helped cause the panic that fueled the run.
“SVB’s rollout, for whatever reason, was poorly timed,” said Adam Sterling, assistant dean at Berkeley Law. “Everyone was already fidgety after Silvergate’s collapse.”
Written by: David Yaffe-Bellany, Erin Griffith and Mike Isaac
© 2023 THE NEW YORK TIMES
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