The collapse of Silicon Valley Bank has sent shockwaves through the technology industry, setting off a blame game among executives and investors. The implosion of the bank was caused by a run on its holdings, with panicked tech startups withdrawing their money and sparking a self-fulfilling prophecy. The finger-pointing that followed revealed the factionalism in the tech industry, where crises can be used to advance agendas.
Crypto advocates took the opportunity to preach about their vision of an alternate financial system unmoored from big banks and other gatekeepers. They blamed centralized banking and argued that government regulators had sown the seeds of the bank’s implosion by cracking down on crypto firms. However, the tone quickly shifted as it was revealed that a major crypto company had billions of dollars trapped in Silicon Valley Bank. The stablecoin designed to maintain a constant value of $1 suddenly dipped in price, sending shudders through the market.
Right back at ‘ya
The blame game went in both directions, with some tech investors arguing 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 crisis at Silicon Valley Bank. The debate is unfolding after a tumultuous year for tech companies in which the crypto industry entered a monthslong meltdown, and some of the largest Silicon Valley firms conducted mass layoffs.
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 its holdings, the order said. The 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.
However, Circle, a company that issues stablecoins, a linchpin in crypto trading, keeps a portion of its cash reserves at Silicon Valley Bank, according to its financial statements. After a day of frantic speculation about the extent of Circle’s exposure, the company revealed late Friday that $3.3 billion of its $40 billion reserves remained at Silicon Valley Bank. “Wires initiated on Thursday to remove balances were not yet processed,” Circle said in a statement on Twitter.
Unlike other volatile cryptocurrencies, stablecoins are supposed to stay pegged at a price of $1. The uncertainty around Circle caused the price of its popular stablecoin, USDC, to plummet below $1 during trading on Friday and Saturday, raising fears of another crypto industry meltdown. On Friday evening, the giant crypto exchange Coinbase halted conversions between USDC and U.S. dollars, citing the volatility in the market.
As the crisis brewed, though, crypto advocates treated the collapse of Silicon Valley Bank as a chance to press arguments they have been making since the 2008 banking crisis. That upheaval showed financial systems were too centralized, they said, which helped inspire the creation of Bitcoin.
The finger-pointing reveals the deep-seated divisions in the tech industry, where hot startups and trends come and go. Crises can be used to advance agendas, but they also expose weaknesses in the system. As tech companies continue to navigate the tumultuous waters of the digital age, it remains to be seen whether they can weather future storms or whether the finger-pointing will continue.