Silicon Valley Bank (SVB), one of America’s largest banks, declared bankruptcy on Friday, March 10, but what really happened?
The implosion of the Silicon Valley bank, predictably, sparked fear and controversy among experts.
Thus, the “blame game” in the tech industry began, as executives and investors went into meltdown. However, for once the latter did not seem to revolve around a crypto company.
Summary
SVB bankruptcy: are cryptos involved?
The sudden collapse of Silicon Valley Bank on Friday triggered panic in the tech sector. However, crypto executives and investors, who have endured a year of near-constant upheaval, seized the moment to preach and rebuke.
The centralized banking system was to blame, cryptocurrency advocates claimed. Their vision of an alternative financial system, untethered from big banks and other gatekeepers, was better, they claimed.
In fact, these said government regulators, who recently cracked down on crypto companies, had laid the groundwork for the bank implosion.
“Fiat is fragile,” wrote Bitcoin advocate Erik Voorhees, using a common shortcut for traditional currencies. Mo Shaikh, CEO of cryptocurrency company Aptos Labs, on the other hand, said:
“We are experiencing anomalies in the machine. This is an opportunity to take a breather and consider the practicalities of decentralization.”
In any case, the tone has changed quickly as a major cryptocurrency company revealed last Friday that it had billions of dollars trapped in Silicon Valley Bank.
A so-called stablecoin designed to maintain a constant value of $1 suddenly dropped in price, causing chills in the market. At this point, finger pointing went both ways.
Some tech investors argued that the procession of bad actors and overnight collapses in the cryptocurrency world had conditioned people to panic at the first sign of trouble, setting the stage for the Silicon Valley Bank crisis.
As we know, in November, FTX, the cryptocurrency exchange run by Sam Bankman-Fried, went out of business after the cryptocurrency equivalent of a bank run revealed a huge hole in its accounts.
Crypto experts opinion on SVB
Crypto opinion on SVB: the traditional financial system is unstable
Joe Marchese, an investor at venture capital firm Human Ventures, on the current situation of SVB said the following:
“This is the pattern recognition that too many have.”
The blame game is a sign of factionalism in the technology sector, where start-ups and trends come and go and crises can be used to advance agendas. With the implosion of SVB (Silicon Valley Bank) crypto advocates blamed the structures of the traditional financial system for sowing instability.
Some venture capitalists also blamed the panic on social media that caused the bank run. Still others blamed the government for its economic policies, or the bank itself for mismanagement and miscommunication.
The debate is taking place after a tumultuous year for tech companies in which the cryptocurrency industry entered a months-long meltdown and some of Silicon Valley’s largest companies conducted mass layoffs.
Sam Kazemian, the founder of the Frax cryptographic project, gave his opinion on the matter:
“People are just traumatised. I am financially in shock. As soon as you see something, you wonder if there’s fire down there because it smells like smoke. And then you treat it like everything is on fire and get out while you can.”
Silicon Valley Bank began to falter Wednesday when it revealed it had lost nearly $2 billion and announced it would sell assets to meet the demand for withdrawals. The news sparked fear in the tech sector as start-ups rushed to withdraw their money.
Why did the SVB collapse?
As is often the case in bank runs, the above concerns have become a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corporation announced that it was taking over Silicon Valley Bank, marking the biggest banking failure since the 2008 financial crisis.
Technology companies with money on deposit rushed to pay employees and suppliers. Silicon Valley Bank was in “good financial condition before March 9,” according to an order from the California 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 seems to have had a relatively small footprint in the cryptocurrency industry.
The SVB failure and consequences on the crypto world
Historically, many large banks have resisted working with cryptocurrency companies given the legal uncertainty surrounding much of the business. Haseeb Qureshi, cryptocurrency investor at venture capital firm Dragonfly, said:
“Many cryptocurrency start-ups have had a hard time joining Silicon Valley Bank. So our exposure is much lower than anticipated.”
However, there has been at least one notable exception. Circle, a stablecoin issuer, a hub in cryptocurrency trading, maintains 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 last Friday that $3.3 billion of its $40 billion in reserves remained at Silicon Valley Bank.
Unlike other volatile cryptocurrencies, stablecoins are expected to remain pegged at the $1 price. Uncertainty around Circle caused the price of its popular stablecoin, USDC, to plummet below $1 during trading on Friday and Saturday, fueling fears of another cryptocurrency sector meltdown.
On Friday night, giant cryptocurrency exchange Coinbase halted conversions between USDC and U.S. dollars, citing market volatility.
As the crisis progressed, however, cryptocurrency advocates treated the collapse of Silicon Valley Bank as an opportunity to press the arguments they have been making since the banking crisis of 2008.
That upheaval showed that financial systems were too centralized, they said, which helped inspire the creation of Bitcoin.
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