Silicon Valley Bank Collapse: Crypto Advocates Call ‘Opaque’ Financial System

The collapse of Silicon Valley Bank (SVB), the biggest bank failure in the US since the 2008 global recession, set off panic around the world as governments tried to assess the impact on technology start-ups, other financial institutions and even pension funds.

But crypto executives and investors – who have experienced an extremely volatile market over the past year – seized the moment to say “I told you so”.

“Many of us believe that cryptocurrency and blockchain are superior technologies for powering the financial system,” said Brad Nickel, who hosts the crypto podcast Mission: DeFi.

“Silicon Valley Bank, FTX, The 2008 Subprime Crisis, [they all become] an opportunity to point out that our financial system that we all rely on everywhere in the world is opaque and centrally controlled by people,” he told Euronews Next.

“Regulators, investors and banks could have seen how badly things were run. The same goes for Silicon Valley Bank. We had no insight into what their financial situation was other than what they reported.”

Blockchain transactions are more transparent

Bitcoin, the world’s first decentralized currency, “was designed precisely because of banking collapses in 2008,” said Joe Donnelly, chief marketing officer of NiceHash, the leading cryptocurrency mining platform.

“The SVB collapse highlights how important Bitcoin is to the economy; it provides an alternative to the banking system where you don’t have to rely on someone else doing things that you’re not necessarily aware of,” he told Euronews Next.

When politicians and regulators speak out against crypto, they either don’t understand how the system works and the power and transparency it provides [them] to catch fraudsters before they do anything wrong or they are dishonest because they are worried about the loss of control in the financial sector for the government, Nickel added.

The anti-crypto defense

Despite the growing list of crypto supporters jumping to scold and shame financiers, critics of the crypto space have not hesitated to point out how a cryptocentric version of the Silicon Valley Bank failure would have been much worse.

In the coming days, the US Federal Deposit Insurance Corporation (FDIC) will refund SVB’s depositors up to $250,000 (€206,000) while it oversees a process to recover the lost funds. The US government has also stepped in to prevent more bank runs.

Bitcoin and altcoin advocates, on the other hand, would have no savior to come and support them if the cryptosystem collapses.

“We have never had to have a rescue operation. We’ve never had the government come in and bail people out because the system worked the way it was supposed to, Nickel said.

If a protocol fails, if developers do something wrong, “the system knows, the people know, they can all see it and can be notified,” he explains.

“So, when you invest money, you invest in something that is absolutely clear to see. And you can find out in advance if something goes wrong,” he added.

“Regulators don’t have that power now”.

Two banks with a strong crypto focus failed. Why?

Nor did it take long for crypto critics to point fingers at the many crypto-friendly venture capital funds Silicon Valley Bank had. Similarly, Silvergate Capital and Signature – two other US banks that also failed last week – had a strong strong crypto focus.

Nickel and Downie agree that the November 2022 collapse of crypto exchange FTX and trading house Alameda Research could have played a role in the failure of these crypto-focused banks.

“I think this was probably the fallout from all the FTX … there was so much money involved in it,” Downie said.

“The fallout from that was certainly felt. You had a lot of startups in the crypto market that had their deposits in Silvergate, a lot of investors,” Nickel added.

The FTX crash exposed an $8 billion (€7.5 billion) hole in its accounts, and more than a million people were reportedly affected by the collapse.

But the collapse was not crypto’s fault, Nickel is quick to clarify.

FTX bought and sold cryptocurrencies, but the problem was their financial backing: their bank accounts were opaque.

“A lot of people trusted what they were doing and trusted that they had the funds they were supposed to have … but what they were doing was not happening out in the open, open for the world to see,” he said.

There’s another caveat that’s important to understand: Silvergate Bank ran a traditional financial system that tried to deal with a different financial model that “doesn’t necessarily share the same nature and behavior.”

Due to the highly volatile nature of cryptocurrencies, “people in this space are more likely to move money faster than would happen in the traditional banking sector; because we are so used to being able to move our money, says Nickel.

And the banks are not used to these rapid swings, so they panic, they fall, and then eventually hurt crypto as well.

“Despite the fact that cryptocurrencies are not centralized, they are still subject to the market… And initially they went down because people are still panicking,” Downie said. “But then they have come back quite strongly”.

Was Signature Bank Seized For Sending A Message About Crypto?

There is another possible rationale behind the collapse of crypto-friendly banks.

On Tuesday, Barney Frank, a former member of the US Congress who sat on Signature’s board, said the regulatory takeover of the New York-based bank was intended to send a message to other US banks to stay out of the cryptocurrency business.

He said that despite a wave of withdrawals, the bank’s situation was under control before regulators intervened.

“This was just a way of telling people, ‘We don’t want you dealing with crypto,'” Frank said in an interview with The Associated Press.

Nickel says he’s not a big believer in conspiracy theories, “but when someone like Barney Frank says something like that, I start paying attention. And that’s very concerning to me”.