Silicon Valley Bank Collapse Initiates Blame Between Crypto and Tech

SAN FRANCISCO — For once, the crisis didn’t seem to be about a cryptocurrency company.

The sudden collapse of Silicon Valley Bank on Friday set off panic across the technology industry. But crypto executives and investors — who have endured a year of near-constant upheaval — seized the moment to preach and lash out.

Centralized banking was to blame, the crypto advocates so. Their vision of an alternative financial system, freed from big banks and other gatekeepers, was better. They argued that the government’s recent crackdown on crypto firms had sown the seeds for the bank’s implosion.

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

“We see bugs in the machine,” said Mo Shaikh, CEO of crypto company Aptos Labs. “This is an opportunity to take a breather and consider the practicalities of decentralization.”

But the tone quickly shifted, when a major crypto company revealed late 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 fell in price, sending tremors through the market.

And the finger pointing went both ways. Some tech investors argued that the crypto world’s procession of bad actors and overnight collapses had conditioned people to panic at the first sign of trouble, setting the stage for the Silicon Valley Bank crisis. In November, FTX, the crypto exchange run by Sam Bankman-Fried, went out of business after the crypto equivalent of a bank run revealed a huge hole in its accounts.

“It’s the pattern recognition that a lot of people have,” 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 agendas. When Silicon Valley Bank imploded, crypto advocates blamed the structures of the traditional financial system for sowing instability. Some venture investors blamed the panic on social media affecting the banking run. Others blamed the government for its economic policies, or the bank itself for poor management and poor communication.

The debate comes after a turbulent year for tech companies that saw the crypto industry enter a month-long meltdown and some of Silicon Valley’s biggest firms carried out mass layoffs.

“People are just traumatized. They are financially shocked, says Sam Kazemian, the founder of the crypto project Frax. “As soon as you see something, you wonder if there’s a fire over there because you smell smoke. And then you treat it like everything is on fire and get out while you still can.”

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 set off fears in the tech industry, as startups rushed to cash out.

As often happens in bank runs, these concerns became a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corporation announced it was taking control of Silicon Valley Bank, marking the biggest bank failure since the financial crisis of 2008. Technology companies with money deposited into the bank were fighting over paying employees and suppliers.

Silicon Valley Bank was in “sound financial condition prior to March 9,” according to an order from California’s Department of Financial Protection and Innovation. It became insolvent after investors and depositors caused a run on the holdings, the order says.

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

“A lot of crypto startups had a very hard time getting on board Silicon Valley Bank,” said Haseeb Qureshi, a crypto investor at venture capital firm Dragonfly. “So our exposure is much less than we expected.”

There was at least one notable exception. Circle, a company that issues stablecoins, a hub of crypto trading, retains a portion of its cash holdings in Silicon Valley Bank, according to its financial statements.

After a day of frantic speculation about the extent of Circle’s exposure, the company disclosed late Friday that $3.3 billion of its $40 billion in reserves remained in Silicon Valley Bank. “Wires started on Thursday to clear balances not yet processed,” Circle so in a statement on Twitter.

Unlike other volatile cryptocurrencies, stablecoins are supposed to remain pegged at a price of $1. The uncertainty surrounding Circle caused the price of the popular stablecoin, USDC, to plunge below $1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. Friday night, the giant crypto exchange Coinbase stopped conversions between USDC and the US dollar, citing the volatility of the market.

As the crisis began, crypto advocates treated the collapse of Silicon Valley Bank as a chance to push arguments they’ve 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.

“Centralized entities are more opaque,” said Brad Nickel, who hosts the crypto podcast “Mission:DeFi.” “If cryptocurrency ran the economic rails of our world, many things might not happen or would be much less serious.”

But the run on Silicon Valley also followed a playbook reminiscent of crises that erupted last year in the crypto industry, culminating in the implosion of FTX.

Critics of the crypto industry argued that a cryptocentric version of the Silicon Valley Bank failure would end up worse for everyone.

“If this was an unregulated cryptobank, then the money could just disappear,” Mr. Marchese said. The fact that the FDIC stepped in to deal with the situation in an orderly manner showed that “the system works,” he said.

In the coming days, the FDIC will refund the bank’s depositors up to $250,000 while it oversees a process to recover the lost funds. “There is no crypto regulator that insures accounts for $250,000,” said Danny Moses, an investor in Moses Ventures known for his role in predicting the 2008 crisis in “The Big Short.”

Other analysts argued that Silicon Valley Bank had exacerbated the crisis by announcing its financial losses shortly after Silvergate Capital, a bank with close ties to the crypto industry, began winding down its operations this past week. The pointed out that the way Silicon Valley Bank communicated helped cause the panic that fueled the run.

“SVB’s rollout, for whatever reason, was poorly timed,” said Adam Sterling, associate dean at Berkeley Law. “Everyone was already uneasy after the collapse of Silvergate.”