Silicon Valley Bank collapse: Crypto advocates decry ‘opaque’ financial system

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The collapse of Silicon Valley Bank (SVB), the biggest bank failure in the United States since the global recession of 2008, has caused panic around the world as governments try to assess its impact on start-ups technologies, other financial institutions and even pension funds.

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

“A lot of us believe that cryptocurrency and blockchain are superior technology for running the financial system,” said Brad Nickel, who hosts the crypto podcast Mission: DeFi.

“Silicon Valley Bank, FTX, the 2008 mortgage crisis, [they all become] an opportunity to highlight that our financial system that we rely on all over the world is opaque and centrally controlled by human beings,” he told Euronews Next.

“Regulators, investors and banks could have seen how badly things were being handled. The same goes for Silicon Valley Bank. We had no idea of ​​their financial situation, except what they said”.

Blockchain transactions are more transparent

Bitcoin, the world’s first decentralized currency, “was engineered precisely because of the bank collapse of 2008,” said Joe Donnelly, chief marketing officer at NiceHash, the leading cryptocurrency platform for cryptocurrency. mining.

“SVB’s collapse shows 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 to do things you aren’t even 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 gives [them] to catch scammers before they do something wrong or, they are being dishonest because they are worried about governments losing control of the financial sector,” Nickel added.

counter-crypto-defense

Despite the growing list of crypto supporters jumping in to scold and shame financiers, critics in the crypto space have been quick to point out how a crypto-centric version of the Silicon Valley Bank failure would have been much worse.

In the coming days, the US Federal Deposit Insurance Corporation (FDIC) will reimburse SVB depositors up to $250,000 (€206,000) while overseeing a process to recover lost funds. The US government also intervened to prevent further bank runs.

Bitcoin and altcoin proponents, on the other hand, would have no saviors to come to their aid if the crypto system collapses.

“We never needed a bailout. We never needed the government to step in and save people because the system was working the way it was supposed to,” Nickel said.

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

“So when you invest money, you are investing in something that is completely clear to be seen. And you can know in advance if something is wrong,” he added.

“Regulators don’t have that power now.”

Two heavily crypto-focused banks failed. For what?

It also didn’t take long for crypto critics to point the finger at the many crypto-friendly venture capital funds that Silicon Valley Bank had. Similarly, Silvergate Capital and Signature – two other US banks that also went bankrupt last week – also had a heavy focus on crypto.

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

“I think it was probably all the FTX spinoffs…there was so much money at stake,” Downie said.

“The impacts of that were definitely felt. You had a lot of crypto start-ups that had their deposits at Silvergate, a lot of investors,” Nickel added.

FTX’s 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 the crypto’s fault, Nickel is quick to clarify.

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

“A lot of people trusted what they were doing and thought they had the funds they were supposed to have…but what they did didn’t happen in the open, in a transparent way for the world sees it,” he said.

There is another caveat that is important to understand: Silvergate Bank was running a traditional financial system trying to run a different financial model that “does not 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 be the case in traditional banking; because we’re so used to being able to move our money around,” says Nickel.

And the banks are not used to these rapid fluctuations, so they panic, they fall, and finally they hurt the crypto too.

“Despite the fact that cryptocurrencies are not centralized, they are still market-driven…And initially they went down because people are still panicking,” Downie said. “But they bounced back pretty strong.”

Has Signature Bank been seized to send a message about crypto?

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

On Tuesday, Barney Frank, a former US congressman who served on Signature’s board of directors, said the regulatory takeover of the New York-based bank was intended to send a message to other US banks to stay away from the cryptocurrency industry.

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

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

Nickel says he’s not a big fan of conspiracy theories, “but when someone like Barney Frank says something like that, I start to pay attention to it. And that, to me, is very concerning.”

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