March 20, 2023

SAN FRANCISCO — This time around, the crisis doesn’t appear to be centered around a single cryptocurrency company.

The sudden collapse of Silicon Valley Bank last Friday sparked panic across the tech industry. But after a year of near-constant turmoil, cryptocurrency executives and investors seized the opportunity to preach and scold.

Crypto Advocates Blame Centralized Banking explain. Their vision for an alternative financial system free from big banks and other gatekeepers is better oneThey believe that the recent government regulators cracking down on crypto companies have sown the seeds of a bank implosion.

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

“We’re seeing machines malfunctioning,” said Mo Shaikh, the cryptocurrency firm’s chief executive Aptos Laboratory“This is an opportunity to take a breath and consider the practicalities of decentralization.”

But the tone quickly changed as a major cryptocurrency company disclose It had billions of dollars stuck in Silicon Valley Bank late Friday. A sudden drop in the price of a so-called stablecoin designed to maintain a constant value of $1 has sent shudders through the markets.

Blaming goes both ways. Some tech investors believe the parade of bad actors and overnight meltdowns in the cryptocurrency world has already spooked people at the first sign of trouble, setting the stage for a crisis at Silicon Valley Bank. In November, cryptocurrency exchange FTX, run by Sam Bankman-Fried, collapsed after a bank run on the cryptocurrency equivalent exposed a huge hole in its account.

“Too many people have this pattern recognition,” says Joe Marchese, an investor at venture capital firm Human Ventures.

The blame game is a hallmark of factionalism in the tech industry, where hot startups and trends come and go, and crises can be used to advance the agenda. With the collapse of Silicon Valley Bank, crypto advocates have accused the structure of the traditional financial system of sowing the seeds of instability. Some venture capitalists have blamed social media panic for triggering the bank run. Others blame the government for its economic policies, or the banks themselves for mismanagement and miscommunication.

The debate is unfolding after a tumultuous year for tech companies, with the crypto industry entering a months-long meltdown and mass layoffs at some of the biggest Silicon Valley companies.

“People are just traumatized. They’re financially shocked,” said Sam Kazemian, founder of cryptocurrency project Frax. “As soon as you see something, you wonder if it’s on fire over there because it smells like smoke. Then you treat it like everything is burning and get out before you can.”

Silicon Valley Bank got off to a rocky start Wednesday, when it revealed it had lost nearly $2 billion and announced it would sell assets to meet withdrawals. The news sparked panic in the tech industry as start-ups scrambled to divest.

As so often happens in bank runs, these fears became a self-fulfilling prophecy. On Friday, the FDIC announced it was taking over Silicon Valley Bank, the largest bank failure since the 2008 financial crisis. Tech companies that put their money in the bank are scrambling to pay their employees and suppliers.

According to one analyst, Silicon Valley Bank is “financially healthy through March 9” Order From the California Department of Financial Protection and Innovation. It became insolvent after investors and savers caused a run on its holdings, the order said.

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

“A lot of cryptocurrency startups have a hard time joining Silicon Valley Bank,” said Haseeb Qureshi, a cryptocurrency investor at venture capital firm Dragonfly. “So our exposure is much less than we expected.”

There is at least one notable exception. According to Circle, a company that issues stablecoins that are key to cryptocurrency transactions, it parks some of its cash reserves at Silicon Valley Bank. Financial Statements.

After a day of wild 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. “The wire transfer initiated on Thursday to delete the balance has not been processed,” Circle said. explain in a statement on Twitter.

Unlike other volatile cryptocurrencies, stablecoins should be priced at $1. Circle’s uncertainty sent its popular stablecoin USDC plunging below $1 in Friday and Saturday trading, raising fears of another collapse in the crypto industry. On Friday night, major cryptocurrency exchange Coinbase Suspend the conversion between USDC and the dollar, citing market volatility.

However, with the crisis brewing, cryptocurrency advocates see the SVB collapse as an opportunity to underscore the arguments they have been making since the 2008 banking crisis. This turmoil, they say, shows that the financial system is too centralized, which helped inspire the creation of bitcoin.

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

But the Silicon Valley competition also follows a playbook reminiscent of the crisis that erupted in the crypto industry last year, culminating in the implosion of FTX.

Critics of the crypto industry argue that a crypto-centric version of SVB’s failure would be worse for everyone.

“If this was an unregulated cryptocurrency bank, the money could disappear,” Mr. Malches said.In fact, the FDIC stepped in to deal with the situation in an orderly fashion It says “The system is running,” he said.

Over the next few days, the FDIC will refund up to $250,000 to depositors at the bank while it oversees the process of recovering lost funds. “No cryptocurrency regulator insures a $250,000 account,” said Danny Moses, an investor at Moses Ventures, known for predicting the 2008 crisis in “The Big Short.”

Other analysts believe the crisis was exacerbated by SVB’s announcement of its financial losses shortly after Silvergate Capital, a bank with close ties to the cryptocurrency industry, began scaling back its operations last week.them pointed out The way Silicon Valley Bank communicated contributed to the panic that sparked the panic.

“For whatever reason, the launch of the SVB was not timely,” said Berkeley Law Assistant Dean Adam Sterling. “After the Silvergate debacle, everyone is already on their knees.”

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