SAN FRANCISCO — This time, the crisis didn’t seem to revolve around a cryptocurrency company.
The sudden collapse of Silicon Valley Bank on Friday sent panic across the tech industry. But crypto managers and investors — who have endured a year of near-constant turmoil — seized the moment to preach and berate.
Centralized banking is to blame, crypto proponents said. Their vision of an alternative financial system independent of big banks and other gatekeepers was better. They argued that government regulators, who recently cracked down on crypto companies, sowed the seeds of the bank’s failure.
“Fiat is fragile,” wrote bitcoin advocate Eric Voorhees, using a common shorthand name for traditional currencies.
“We’re seeing machine failures,” said Mo Sheikh, CEO of crypto company Aptos Labs. “It’s an opportunity to catch your breath and consider the practical aspects of decentralization.”
But the tone quickly changed when a major crypto company revealed on Friday night that it had billions of dollars in a Silicon Valley bank. The so-called stablecoin, designed to maintain a constant value of $1, suddenly fell in price, sending shivers through the market.
And the finger-poking went both ways. Some tech investors argued that the crypto world’s parade of bad actors and sudden crashes caused people to panic at the first sign of trouble, setting the stage for the Silicon Valley Bank crisis. In November, FTX, a crypto exchange run by Sam Bankman-Fried, shut down after the crypto equivalent of a bank run revealed a huge hole in its accounts.
“Too many people have that pattern recognition,” said Joe Marchese, an investor at venture capital firm Human Ventures.
The blame game is a sign of factionalism in the tech industry, where hot startups and trends come and go and crises can be used to advance an agenda. When the Silicon Valley bank collapsed, crypto advocates blamed the structures of the traditional financial system for sowing instability. Some venture capitalists blamed the panic on social media that caused 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 that saw the crypto industry plunge into a month-long meltdown and some of Silicon Valley’s biggest firms made massive layoffs.
“People are just traumatized. They are in financial shock,” said Sam Kazemian, founder of the Frax crypto project. “As soon as you see something, you wonder if there’s a fire because it smells like smoke. And then treat it like it’s all on fire and get out while you still can.”
A Silicon Valley bank began reeling on Wednesday when it revealed it had lost nearly $2 billion and announced it would sell off assets to meet demand for withdrawals. The news sent shockwaves through the tech industry as startups rushed to withdraw their money.
As is often the case with banks, these worries became a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corp. announced it was taking over Silicon Valley Bank, the largest bank failure since the 2008 financial crisis. Tech companies with money in the bank have started paying employees and vendors.
Silicon Valley Bank was in “good financial standing as of March 9,” according to an order from the California Department of Financial Protection and Innovation. It became insolvent after investors and depositors triggered a flight from its holdings, the order said.
Silicon Valley Bank seems to have a relatively small footprint in the crypto industry. Historically, many large banks have resisted working with crypto companies due to the legal uncertainty surrounding much of the business.
“A lot of crypto startups have had a really hard time getting into a Silicon Valley bank,” said Haseeb Qureshi, a crypto investor at venture capital firm Dragonfly. “So our impact is much smaller than we expected.”
There was at least one notable exception. Circle, which issues stablecoins and is a mainstay of crypto trading, keeps some of its cash reserves at Silicon Valley Bank, according to its financial statements.
After a day of wild speculation about the extent of Circle’s exposure, the company revealed Friday night that $3.3 billion of its $40 billion remained in Silicon Valley Bank. “The wires initiated on Thursday to remove the debris have not yet been processed,” Circle said in a statement on Twitter.
Unlike other volatile cryptocurrencies, stablecoins must remain pegged to a price of $1. The uncertainty surrounding Circle caused the price of its popular USDC stablecoin to plummet below $1 during trading on Friday and Saturday, sparking fears of yet another crypto industry meltdown. Crypto exchange giant Coinbase halted conversions between USDC and US dollars on Friday evening, citing market volatility.
However, as the crisis grew, crypto advocates took the collapse of Silicon Valley Bank as an opportunity to substantiate the arguments they had been making since the 2008 banking crisis. These upheavals showed that financial systems were too centralized, they said, which helped inspire the creation of Bitcoin.
“Centralized entities are more opaque,” said Brad Nickell, host of the crypto podcast Mission:DeFi. “If cryptocurrency were driving the financial rails of our world, a lot of things might not have happened or would be much less violent.”
But the run in Silicon Valley also followed a playbook reminiscent of the crises that erupted last year in the crypto industry, culminating in the collapse of FTX.
Critics of the crypto industry argued that a crypto-centric version of the Silicon Valley Bank bankruptcy would have ended worse for everyone.
“If it was an unregulated cryptobank, the money could just disappear,” Marquez said. The fact that the FDIC stepped in to handle the situation in an orderly manner showed that “the system is working,” he said.
In the coming days, the FDIC will return up to $250,000 to the bank’s depositors as it monitors the process of recovering the lost funds. “There is no crypto regulator insuring $250,000 accounts,” said Danny Moses, an investor at Moses Ventures who is known for his role in predicting the 2008 crisis in the movie “The Big Short.”
Other analysts argued that Silicon Valley Bank exacerbated the crisis by announcing its financial losses shortly after Silvergate Capital, a bank with close ties to the crypto industry, began winding down last week. They noted that the way Silicon Valley Bank communicated helped create the panic that fueled the flight.
“The deployment of the SVB was unsuccessful for whatever reason,” said Adam Sterling, assistant dean at Berkeley Law. “Everyone was already in a frenzy after the Silvergate collapse.”