Crypto advocates call “opaque” financial system

The collapse of the Silicon Valley Bank (SVB), the largest bank failure in the US since the 2008 global recession, sparked panic around the world as governments tried to assess the impact on tech startups, 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.”

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

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

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

Blockchain transactions are more transparent

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

“SVB collapse underscores the importance of bitcoin to the economy; it offers an alternative to the banking system where you don’t have to rely on someone else to do things you’re not 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 there is [them] to catch scammers before they do anything wrong, or they are disingenuous because they are worried about governments losing control of the financial sector,” Nickel added.

The Counter-Crypto Defense

Despite the growing list of crypto supporters berating and shaming financiers, critics of the crypto space have not hesitated to point out that a crypto-centric version of the Silicon Valley bank failure would have been far worse.

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

Bitcoin and altcoin proponents, on the other hand, would have no savior to back them up if the crypto system collapsed.

“We have never had to carry out a rescue operation. The government never had to step in and save people because the system was working as it should,” Nickel said.

When a protocol fails, when developers get it wrong, “the system knows, people know, they all can see and can be warned,” he explains.

“So when you invest money, invest in something that is very clear to see. And you can find out beforehand if something goes wrong,” he added.

“Regulators don’t have that power now.”

Two banks with a strong crypto focus failed. Why?

It also didn’t take long for crypto critics to point fingers at Silicon Valley Bank’s many crypto-friendly venture capital funds. Likewise, Silvergate Capital and Signature — two other American banks that also failed last week — also had a strong crypto focus.

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

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

“The effects of that were certainly felt. They had a lot of crypto startups that had their deposits in Silvergate, a lot of investors,” Nickel added.

The FTX crash exposed an $8 billion hole in its accounts and reportedly more than a million people were affected by the crash.

But the collapse wasn’t Crypto’s fault, Nickel is quick to point out.

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

“A lot of people had faith in what they were doing and that they had the resources they were supposed to have … but what they were doing wasn’t happening openly and transparently for the world to see,” he said.

There’s another caveat to understand: Silvergate Bank operated a traditional financial system trying to deal with a different financial model that “doesn’t necessarily have the same nature and behavior.”

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

And banks aren’t used to these rapid swings, so they panic, they crash, and then they end up hurting crypto as well.

“Despite the fact that cryptocurrencies aren’t centralized, they’re still being conditioned by the market… And initially they went down because people are still panicking,” Downie said. “But then they bounced back pretty hard.”

Has the Signature Bank been 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 Congress who served on Signature’s board of directors, said the New York-based bank’s regulatory acquisition should send a message to other US banks to stay away from the cryptocurrency business.

He said that despite a spate of withdrawals, the bank’s situation was under control before regulators stepped in.

“This was just a way of saying to people, ‘We don’t want you involved with crypto,'” Frank said in an interview with the Associated Press.

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

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