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 through the technology industry. But crypto executives and investors, who have endured a year of near-constant turmoil, used the moment to preach and scold.
Central banking was to blame, cryptocurrency advocates saying. His vision of an alternative financial system, decoupled from big banks and other gatekeepers, was better. They argued that government regulators who recently cracked down on crypto firms had sown the seeds of the bank’s implosion.
“Fiat is fragile”, wrote Bitcoin advocate Erik Voorhees, using a common abbreviation for traditional currencies.
“We are seeing machine failures,” said Mo Shaikh, chief executive of the cryptocurrency company. Suitable Laboratories. “This is an opportunity to take a breather and consider the practicalities of decentralization.”
But the tone quickly changed, as a major crypto company revealed on Friday night that he had billions of dollars trapped in Silicon Valley Bank. A supposed stablecoin designed to hold a constant value of $1 suddenly dropped in price, sending chills through the market.
And the finger pointing went both ways. Some tech investors argued that the procession of bad actors and the overnight crashes of the crypto world 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, shut down after the crypto equivalent of a bank run exposed a gaping hole in its accounts.
“That’s the pattern of recognition that many 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 trends come and go and crises can be used to further agendas. When Silicon Valley Bank collapsed, cryptocurrency advocates blamed the structures of the traditional financial system for sowing instability. Some venture investors blamed the panic on social media for the bank run. Others blamed the government for its economic policies, or the bank itself for poor management and poor communication.
The debate comes after a tumultuous year for tech companies in which the crypto industry went into a months-long meltdown 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’s a fire in there because it smells like smoke. And then you treat it like everything is burning and get out while you can.”
Silicon Valley Bank began to reel on Wednesday, revealing it had lost nearly $2 billion and announcing it would sell assets to meet demand for withdrawals. The news sparked fear in the tech industry, as startups scrambled to get their money out.
As is often the case with bank runs, those worries became 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 deposited in the bank scrambled to pay employees and vendors.
Silicon Valley Bank was in “good financial condition prior to March 9,” according to a order from the California Department of Financial Protection and Innovation. It filed for insolvency after investors and depositors caused a run on its holdings, according to the order.
Silicon Valley Bank seems to have had a relatively small presence in the crypto industry. Historically, many large banks have been resistant to working with crypto companies, given the legal uncertainty surrounding much of the business.
“Many cryptocurrency startups had a hard time getting on board with Silicon Valley Bank,” said Haseeb Qureshi, a cryptocurrency investor at venture capital firm Dragonfly. “So our exposure is much less than we expected.”
There was at least one notable exception. Circle, a company that issues stablecoins, a key player in cryptocurrency trading, keeps a portion of its cash reserves at Silicon Valley Bank, according to its financial statements.
After a day of frenzied speculation about the extent of Circle’s exposure, the company revealed late Friday that $3.3 billion of its $40 billion in reserves remained with Silicon Valley Bank. “Bank transfers initiated Thursday to remove balances have not yet processed,” Circle saying in a statement on Twitter.
Unlike other volatile cryptocurrencies, stablecoins are supposed to remain pegged at a price of $1. Uncertainty surrounding Circle caused the price of its popular stablecoin USDC to fall below $1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. On Friday night, crypto exchange giant Coinbase stopped conversions between USDC and US dollars, citing market volatility.
However, as the crisis brewed, cryptocurrency advocates treated the collapse of Silicon Valley Bank as an opportunity to press the arguments they have been making since the 2008 banking crisis. That turmoil showed that 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 “Mission:DeFi” crypto podcast. “If cryptocurrency were to drive the financial rails of our world, many things might not happen or would be much less dire.”
But the Silicon Valley run also followed a playbook reminiscent of crises that erupted in the crypto industry last year, culminating in the implosion of FTX.
Critics of the crypto industry argued that a crypto-centric version of the Silicon Valley Bank failure would have ended worse for everyone.
“If it was an unregulated crypto bank, the money could disappear,” Marchese said. The fact that the FDIC stepped in to handle the situation in an orderly manner It showed that “the system is working,” he said.
In the coming days, the FDIC will reimburse bank depositors up to $250,000 while it oversees a process to recover the lost funds. “There is no crypto regulator that insures 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 argued that Silicon Valley Bank had 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 operations last week. They he pointed that Silicon Valley Bank’s manner of communication helped spark the panic that fueled the run.
“The implementation of SVB, for whatever reason, was not done at the right time,” said Adam Sterling, associate dean at Berkeley Law. “Everyone was already nervous after the Silvergate collapse.”
