Silicon Valley Bank Collapse: Crypto Advocates Call Financial System 'Opaque'

The collapse of Silicon Valley Bank (SVB), the largest bank failure in the United States since the 2008 global recession, sparked worldwide panic as governments sought to assess its impact on tech startups, other institutions financial and even pension funds.

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

“Many of us believe that cryptocurrency and the blockchain are a superior technology for running the financial system,” said Brad Nickel, host of the Mission: DeFi cryptocurrency podcast.

“Silicon Valley Bank, FTX, the 2008 mortgage crisis, [they all become] an opportunity to point out that our financial system that we rely on around the world is opaque and centrally controlled by humans,” he told RockedBuzz via Euronews Next.

“Regulators, investors and banks could have seen how bad things were going. The same goes for Silicon Valley Bank. We had no information about what their financial situation was, except what they reported.”

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Blockchain transactions are more transparent

Bitcoin, the world’s first decentralized currency, “was designed precisely because of the bank crashes in 2008,” said Joe Donnelly, head of marketing at NiceHash, the leading cryptocurrency mining platform.

“SVB’s collapse highlights how important Bitcoin is to the economy; it provides an alternative to banking where you don’t have to rely on someone else doing things you don’t necessarily know about,” he told RockedBuzz via Euronews Next.

When politicians and regulators speak out against cryptocurrencies, “they either don’t understand how the system works and the power and transparency it offers [them] to catch scammers before they do something wrong or, they are fake because they are concerned about governments losing control in the financial sector,” Nickel added.

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Defense against cryptocurrencies

Despite the growing list of crypto advocates jumping in to berate and shame financiers, critics of the crypto space have not hesitated to point out how a crypto-centric version of the Silicon Valley Bank failure would have been much worse.

Over the next few days, the US Federal Deposit Insurance Corporation (FDIC) will repay SVB depositors up to $250,000 (€206,000) by overseeing a process to recover lost funds. The US government also stepped in to prevent further bank runs.

Supporters of Bitcoin and altcoins, on the other hand, would have no savior to come and support them if the crypto system collapses.

“We never needed a bailout plan. We never had to bring in the government and bail out people because the system worked the way it was supposed to,” Nickel said.

If a protocol doesn’t work, if the developers are doing something wrong, “the system knows it, the people know it, everyone can see it and they can be notified,” he explains.

“So when you invest money, you are investing in something that is completely visible. And you can find out in advance if something is going wrong,” she added.

“Regulators don’t have that power now.”

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Two banks with a strong focus on cryptocurrencies have gone bankrupt. Why?

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

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

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

“The impacts of that have certainly been felt. There were a lot of startups in the crypto space that had their depositories in 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 crash.

But the crash wasn’t the cryptocurrency’s fault, Nickel is quick to clarify.

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

“A lot of people trusted what they were doing and trusted that they had the funding that they should have…but what they did, it didn’t happen in the open, transparently for the world to see,” he said.

There is another caveat that is important to understand: Silvergate Bank was operating a traditional financial system trying to manage different financial models that “do not necessarily share the same nature and behavior”.

Due to the very volatile nature of cryptocurrencies, “people in this space are more likely to move money faster than they would be in traditional banking; because we’re so used to being able to move our money around,” Nickel says.

And banks are not used to these rapid fluctuations, so they panic, fall and eventually hurt cryptocurrencies as well.

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

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Signature Bank seized to send a message about cryptocurrencies?

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

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

He said despite a surge in levies, the bank’s situation was under control before regulators intervened.

“This was just a way to tell people, ‘We don’t want you to deal with cryptocurrencies,’” Frank said in an interview with the AP.

Nickel says he doesn’t believe much in conspiracy theories, “but when someone like Barney Frank says something like that, I start to pay attention. And that, to me, is very worrying.