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Silicon Valley Bank Collapse Sparks Debate on Crypto's Role in Decentralizing Finance System

The recent collapse of Silicon Valley Bank has sent shockwaves across the technology industry. Crypto executives and investors, who have experienced almost constant turmoil over the past year, have used the moment to push their vision of an alternate financial system, free from the constraints of big banks and other gatekeepers.

Crypto advocates have blamed the structures of traditional finance systems for sowing instability and have seized the opportunity to preach the practicalities of decentralization. They argue that government regulators who recently cracked down on crypto firms are also to blame for the bank's implosion.

But the blame game has gone both ways, with some tech investors pointing out that the procession of bad actors and overnight collapses in the crypto world has conditioned people to panic at the first sign of trouble, setting the stage for the crisis at Silicon Valley Bank.

Picture: Kumaon Jagran

The finger-pointing 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. As Silicon Valley Bank imploded, some venture investors blamed the social media panic that touched off the bank run. Others blamed the government for its economic policies, or the bank itself for poor management and worse communication.

The collapse of Silicon Valley Bank comes after a tumultuous year for tech companies, in which the crypto industry experienced a months-long meltdown, and some of the largest Silicon Valley firms conducted mass layoffs. The fear of the unknown has left many people financially shellshocked, and as soon as they see something, they wonder if there's a fire over there because it smells like smoke.

Silicon Valley Bank started to wobble on Wednesday when it revealed it had lost almost $2 billion and announced it would sell off assets to meet the demand for withdrawals. The news sparked fear in the tech industry, as startups rushed to withdraw their money.

As often happens in bank runs, those concerns became a self-fulfilling prophecy. On Friday, the Federal Deposit Insurance Corp. announced it was taking control of Silicon Valley Bank, marking the largest bank failure since the 2008 financial crisis. Tech companies with money deposited in the bank scrambled to pay employees and vendors.

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. However, Circle, a company that issues stablecoins, a linchpin in crypto trading, kept 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 on 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 US dollars, citing the volatility in the market.

As the crisis brewed, 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 that financial systems were too centralized, they said, which helped inspire the creation of bitcoin.

"Crypto-centric entities are more opaque," said Brad Nickel, who hosts the crypto podcast "Mission: DeFi." "If cryptocurrency were powering the financial rails of our world, then a lot of things might not happen, or they would be a lot less severe."

Critics of the crypto industry argued that a crypto-centric version of Silicon Valley Bank’s failure would have ended worse for everyone.

“If this was an unregulated crypto bank, then the money could just disappear,” Marchese said. The fact that the FDIC stepped in to handle the situation in an orderly fashion showed “the system is working,” he said.

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

Other analysts argued that Silicon Valley Bank had worsened the crisis by announcing its financial losses shortly after Silvergate Capital, a bank with close ties to the crypto industry, started winding down its operations this past week. They pointed out that the manner of Silicon Valley Bank’s communication helped cause the panic that fueled the run.

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

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