The collapse of Silicon Valley Bank sparked a blame game in the tech industry

SAN FRANCISCO — Not once did the crisis seem to revolve around cryptocurrency companies.

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

Cryptocurrency advocates said centralized banking was to blame. The vision of an alternative financial system freed from big banks and other gatekeepers was better. They argued that government regulators that recently cracked down on cryptocurrency companies sowed the seeds of bank failure.

“Fiat currencies are fragile,” writes Bitcoin proponent Eric Voorhees, using a common abbreviation for traditional currency.

“We are seeing glitches in the machine,” said Mo Shaikh, CEO of cryptocurrency company Aptos Labs. “This is an opportunity to take a breather and think about the practicalities of decentralization.”

However, the tone quickly changed as a major cryptocurrency firm revealed billions of dollars trapped in Silicon Valley banks late Friday. A so-called stablecoin, designed to maintain a constant value of $1, suddenly plunged in price, sending shivers through the market.

And the pointing went both ways. Some tech investors argued that falling apart overnight with the villains of the crypto world set the stage for a Silicon Valley bank crisis, with people panicking at the first sign of trouble. In November, Sam Bankman-Fried’s FTX, a cryptocurrency exchange run by him, went out of business after a huge hole in his account was caused by a cryptocurrency that rivaled a bank run.

“This is pattern recognition that too many people have,” said Joe Marchese, an investor at venture capital firm Human Ventures.

A blame game is a sign of factionalism in the tech industry, where hot startups and trends come and go, and the crisis can be used to advance the agenda. When the Silicon Valley Bank collapsed, cryptocurrency advocates blamed the structure of the traditional financial system for sowing the seeds of instability. Some venture capitalists blamed the social media panic that sparked the bank run. Others blamed the government’s economic policies, or blamed the banks themselves for poor management and poor communication.

The controversy comes after a turbulent year for the tech company, which saw the crypto industry plunge into a months-long meltdown and mass layoffs at some of Silicon Valley’s biggest companies.

“People are just traumatized. They are financially in shock,” said Sam Kazemian, founder of cryptocurrency project Frax. “As soon as I see something, it smells like smoke, so I suspect there’s a fire over there. Then treat everything as if it’s on fire, and get out while I still can.” “

Silicon Valley Bank began shaking Wednesday, revealing it had lost nearly $2 billion and said it would sell assets to meet withdrawal demand. It caused fear in the tech industry.

As is often the case with bank runs, these fears have become self-fulfilling prophecies. On Friday, the Federal Deposit Insurance Corporation announced the largest bank failure since the 2008 financial crisis, dominating Silicon Valley banks. Having put money in the bank, technology companies rushed to pay their employees and vendors.

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. It became insolvent after investors and depositors scrambled for stakes, the order said.

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

“Many crypto startups had a really hard time getting registered with Silicon Valley banks,” said Haseeb Qureshi, a cryptocurrency investor at venture capital firm Dragonfly. Much less.” There was at least one notable exception. Circle, the company that issues stablecoins, the cornerstone of cryptocurrency trading, keeps a portion of its cash reserves in Silicon Valley banks, according to financial statements.

After a day of feverish speculation about the extent of Circle’s exposure, the company revealed late Friday that $3.3 billion of its $40 billion reserves remain in Silicon Valley banks. “The telegram initiated Thursday to remove the balance has not yet been processed,” Circle said in a statement on his Twitter account.

Unlike other volatile cryptocurrencies, the stablecoin should remain pegged at a price of $1. Uncertainty over the circle has pushed the price of popular stablecoin USDC below $1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. Cryptocurrency exchange Coinbase has stopped converting between USDC and US dollars, citing market volatility.

But as the crisis worsened, cryptocurrency advocates treated the failure of the Silicon Valley bank as an opportunity to advance a claim they have made since the 2008 banking crisis. The upheaval showed that the financial system was too centralized, which prompted the birth of Bitcoin, they said.

“Centralized entities are more opaque,” ​​said Brad Nickel, host of the cryptocurrency podcast “Mission: DeFi.” “If cryptocurrencies were to run the financial rails of our world, a lot of things might not happen or be as serious.”

But the Silicon Valley run also followed a playbook reminiscent of the crisis that erupted in the crypto industry last year and culminated in the implosion of FTX.

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

“If this were an unregulated crypto bank, the money could be gone,” Marches said. The fact that the FDIC stepped in to deal with the situation in an orderly fashion shows that “the system is working.”

Over the next few days, the FDIC will refund up to $250,000 to bank depositors while overseeing the process of recovering lost funds. “There is no cryptocurrency regulator that will guarantee a $250,000 account,” said Danny Moses, an investor at Moses Ventures known for his role in predicting the 2008 crisis on “The Big Short.”