By now, everyone is aware of the collapse of Silicon Valley Bank, the panic that ensued as a result, and, going into a new week, the solution that has been struck upon.
As a brief overview, the failure of Silicon Valley Bank is the biggest US banking collapse since 2008, but has been summarized as a conventional bank run. The bank had invested largely in treasury bonds, but rises in interest rates then forced it to sell off assets at a $1.8 billion loss, and launch a $2.2 billion share sale.
Investors became spooked very quickly and a run ensued, ensuring, essentially, that it was all over for the sixteenth largest US lender. Then, over the weekend, federal regulators moved to prevent the damage spiraling out of control, ensuring that all depositors would have access to their funds through a newly created backstop facility.
Notably, Silicon Valley Bank is regarded as a primarily tech-focused institution, and with over 2,500 VC firms utilizing its services, it operated, in its own words, as the “financial partner of the innovation economy”.
Although Silicon Valley Bank is not a crypto bank, the knock-on effects of its travails were alarmingly clear in the crypto world, as, while events were unfolding, the USDC stablecoin was in the process of de-pegging from the dollar, plummeting, at one point, to below 90 cents. This was due to USDC issuer Circle holding around 8% of its reserves at Silicon Valley Bank, and though that situation is now on the way to being resolved, it was a significant wobble.
The Case for Bitcoin
These dramatic events now lead to questions around the stability of the crypto environment, and how sentiment may be affected in an industry still suffering the after-effects of a catastrophic 2022. A simple indicator that can suggest how the ecosystem is feeling, is the price of bitcoin, and in that case, one might assume that matters are not so severe. The leading cryptocurrency only briefly dipped below $20,000 during the crisis, and has since recovered alongside news that Silicon Valley Bank depositors will recover their funds.
It’s also worth keeping in mind that even as speculation unfolded about contagion and wider damage–both to banking and to the tech industry–the entire situation was being highlighted by some prominent commentators as a vindication of Bitcoin’s strengths.
Marty Bent, the Director of Cathedra Bitcoin, a company that develops and operates Bitcoin mining infrastructure, believes the development shows the advantages of a blockchain-based system.
Bitcoin’s value prop has never been clearer; eliminate the systemic counterparty and debasement risks that exists today by giving people a distributed digital cash system that enables people to self custody a scarce asset with relative ease.
— Marty Bent (@MartyBent) March 12, 2023
Bent also made the case for multi-signature (multisig) wallets.
Even though bitcoin’s price is volatile, it makes sense to allocate a portion of your company’s balance sheet to bitcoin held in multisig custody because you’ll never be put in a situation where you cannot access your funds because someone else took risk with your money. https://t.co/6mNFlj8Lf7
— Marty Bent (@MartyBent) March 12, 2023
Suspicion and Speculation
There has been ongoing conjecture around the possibility of hidden political and regulatory motives at work, stemming partly from events at Silicon Valley Bank occurring soon after Silvergate Bank, which is closely connected to the crypto industry, announced that it was going into voluntary liquidation.
On top of that, regulators have also now closed Signature Bank, an establishment that was reported, as of last September, as receiving almost a quarter of its deposits from the crypto sector, although it had intended to limit its crypto exposure. This decision was announced with reference to “strengthening public confidence in our banking system”.
Changpeng Zhao, the CEO of leading crypto exchange Binance, has speculated openly about “a coordinated effort to shut down crypto friendly banks”, although his comment came with a bullish addendum: “Banks are shut down. Blockchains still running”.
And this line of thought is not novel, as a widely-read post by Nic Carter, a general partner at Castle Island Ventures and an influential voice when it comes to crypto, has already laid out the case for what has been called Operation Choke Point 2.0. The overall idea put forward is of a campaign to deny crypto firms access to banking services, and thereby isolate the crypto industry.
It's important to emphasize that not everyone agrees with this thesis, and many observers blame recent collapses on nothing more than bad planning during extreme circumstances. However, the prevalence of such thinking (the kind that suspects coordinated plots) demonstrates that sections of the crypto world are on a battle footing, and feel that further conflict with regulators and existing institutions is inevitable, but need not be an insurmountable obstacle.
This is reminiscent of assertively undaunted sentiment throughout 2022, when, even as various crypto entities collapsed, it was repeatedly observed that centralized structures were imploding. By contrast, when it came to Bitcoin, and to the world of decentralized finance, the mechanics at play were intact and operational.
Social Media Acceleration
One other point of note, with regard to Silicon Valley Bank in particular, is the role now played by social media. Real-time crypto chatter takes place largely on Twitter, and the platform can be a valuable tool. This was particularly evident last year when FTX was in a state of freefall, at which time the most astute investigative analysis was often to be found on Twitter, sometimes from entirely anonymous accounts, frequently from alternative, independent channels.
However, another change brought about by the high-speed, ungated flow of information enabled by social media is that any hint of financial or crypto contagion can explode around the world incredibly quickly, and without the possibility of being constrained. In the case of events at Silicon Valley Bank, a plausible line has been drawn from a VC-read newsletter called The Diff, to increased attention on the bank's earnings, warnings issued by Peter Thiel, Twitter amplification, and, in the end, a run on the bank.
For better or worse, social media is now an important dynamic in the ebbs, flows and occasional tidal waves around finance and crypto, creating the potential for rapid acceleration around unfolding stories.
