The Silicon Valley Bank collapse shows cryptocurrency and blockchain are superior technology for running the financial system, say crypto advocates.
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 its impact on tech start-ups, other financial institutions and even pension funds.
But crypto executives and investors - who have endured an extremely volatile market over the past year - seized on 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 mortgage crisis of 2008, [they all become] an opportunity to point out that our financial system that we all everywhere in the world rely upon is opaque and centrally controlled by human beings,” he told Euronews Next.
“Regulators, investors, and banks could have seen how badly things were being run. The same is true of Silicon Valley Bank. We had no insights into what their financial situation was except for what they reported”.
Blockchain transactions are more transparent
Bitcoin, the world’s first decentralised currency, “was designed precisely because of bank collapses in 2008,” said Joe Donnelly, head of marketing at NiceHash, the leading cryptocurrency platform for mining.
“The SVB collapse highlights how Bitcoin is important 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 even aware of,” he told Euronews Next.
When politicians and regulators speak against crypto, they “either don't understand how the system functions and the power and transparency it gives [them] to catch scammers before they do something wrong or, they're being disingenuous because they're concerned about the loss of control in the financial sector for governments,” Nickel added.
The counter-crypto defence
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 crypto-centric version of Silicon Valley Bank’s 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 overseeing 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 saviour to come and support them if the crypto system collapses.
“We've never had to have a bailout. We've never had to have the government come in and save people because the system worked the way it was supposed to,” Nickel said.
If a protocol is failing, if developers are doing something wrong, “the system knows, the people know, they can all see it and can be alerted,” he explains.
“So, when you invest money, you're investing in something that is completely clear to be seen. And you can find out beforehand if something is going wrong,” he added.
“Regulators don't have that power now”.
Two banks with strong crypto-focused failed. Why?
It also didn't take long for crypto critics to point fingers at the many crypto-friendly venture capital funds Silicon Valley Bank had. Likewise, Silvergate Capital and Signature - two other American banks that also failed last week - also had a strong strong crypto focus.
Nickel and Downie concur that the collapse of the 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 probably this was the fallout from all the FTX… there was so much money involved in it," said Downie.
"The impacts from that were certainly being felt. You had a lot of start-ups in the crypto space who had their deposits in Silvergate, a lot of investors," Nickel added.
The FTX crash exposed an $8 billion hole (€7.5 billion) 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 that they were supposed to have… but what they did, did not happen in the open, transparently for the world to see," he said.
There is another caveat that is important to understand: Silvergate Bank ran a traditional finance system trying to deal with a different financial model that does "not necessarily share the same nature and behaviour".
Because of the very volatile nature of cryptocurrencies, “people in this space are more likely to move money more rapidly than would happen in the traditional banking sector; because we're so used to being able to move our money,” says Nickel.
And the banks are not used to these rapid fluctuations, so they panic, they fall, and then ultimately also hurt crypto.
"Despite the fact that cryptocurrencies are not centralised, they are still conditioned by the market… And initially, they went down because people still panic," said Downie. "But then they've bounced back quite strong".
Was Signature Bank seized to send 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 was 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 away from the cryptocurrency business.
He said that despite a wave of withdrawals, the bank’s situation was under control before regulators swooped in.
"This was just a way to tell people, ‘We don’t want you dealing with crypto,’” Frank said in an interview with the Associated Press.
Nickel says he is not a big believer in conspiracy theories, "but when somebody like Barney Frank says something like that, I start to pay attention. And that, to me, is very concerning".