Cryptocurrencies, because the collapse of the sector will not affect the real economy.

This year’s cryptocurrency crash has all the makings of a classic banking crisis: bank runs, short selling, contagion. What is missing are the banks.

Review of bankruptcy filings of cryptocurrency platforms Travel digital holding inc, Celsius LLC Network and fx Commerce Ltd. and hedge funds three arrows Capital, no bank will be found among their main creditors.

Most of their major creditors are customers or other cryptocurrency-related businesses. Cryptocurrency firms, in other words, operate in a closed circuitthey are deeply interconnected within this circuit, but have little significant relationship with traditional finance. This explains why an asset class that was once worth around €1.5 billion has become an asset class in its own right. 3 trillion dollars can lose 72% of their value, while major brokers can go bankrupt, without obvious repercussions on the financial system.

A closed loop system

“The crypto space… is largely circular,” write the economists at . Yale University Gary Gorton and University of Michigan law professor Jeffery Zhang in an upcoming article. “Once cryptocurrencies receive deposits from investors, these companies borrow, lend and trade with themselves. They do not interact with companies linked to the real economy”.

Cryptocurrencies have long been advertised as such an unregulated alternativeanonymous, frictionless and more accessible than banks and traditional currencies. Yet their ecosystem is very similar to the banking system, which takes deposits and makes loans. Gorton and Zhang write, “Cryptocurrency lending platforms have recreated banking from the ground up…if an entity engages in borrowing and lending, it is economically equivalent to a bank even if it is not labeled as such. ”

Blockchain failures

And just like the banking system, cryptography is undermined and interconnected, and therefore vulnerable to debilitation. banking panic and infections. This year’s crisis began last May when EarthUSDA supposed stablecoin, a cryptocurrency that aims to hold a constant value against the dollar, crashed as investors lost faith in its backing asset, a token called Luna. The rumors that Celsius it lost money on Earth and the Moon, causing a run on its deposits, and in July, Celsius filed for bankruptcy.

Meanwhile, the subsidiary Ftx Alameda Research and Voyager have borrowed from each other, and Alameda and Celsius have also exposed each other. But these are the connections between fx and Alameda to ruin both companies. Like many platforms, Ftx issued its own cryptocurrency, ftt. Subsequently, this proved to be Alameda’s main asset, BinanzaAnother major cryptocurrency exchange, FTT, announced it would offload its holdings, sparking the takeover rush that caused the FTT to crash.

Genesis Global Capital, another cryptocurrency lender with exposure to both Three Arrows and Alameda, suspended withdrawals and sought external funds after Ftx disappeared. BlockFianother crypto lender with exposure to FTX and Alameda, is preparing to file for bankruptcy, the European Commission news agency reported. Tree trunk.

Historical parallels

For historians, this litany of contagion and collapse reminds them of the days of banking freedom. from 1837 to 1863When banks started issuing their own banknotes, fraud increased and over-the-counter withdrawals were suspended. panic occurred regularly. However, while these crises have regularly hit businesses, the real economy hasn’t noticed the cryptocurrency meltdown.

To be fair, some investors, from unsophisticated individuals to large venture capitalists, to venture capitalists and venture capitalists… pension fundssuffered losses, in some cases life-changing losses. But these losses are qualitatively different from those that threaten the solvency of credit institutions and the financial system as a whole. Cryptocurrency banks mainly provide custody and payment services or hold the liquidity reserves that guarantee certain payment services. stable currency.

The traditional financing he had little interest in hooking up with cryptocurrencies because unlike government bonds, mortgages, commercial loans, or even derivatives, cryptocurrencies play no role in the real economy. They have been largely avoided as a means of payment, except in cases where non-traceability is critical, such as money laundering and arms trafficking. ransomware. Highly publicized crypto innovations, such as stablecoins and Challengea kind of automated exchange, it mainly facilitates cryptocurrency speculation rather than a useful economic activity.

A matter of reputation

The dirty reputation of cryptocurrencies has repulsed traditional financiers like warren buffet and the CEO of JPMorgan Chase & Co. Jamie Dimonand made regulators very suspicious of banks’ involvement. Over time this attitude was destined to change, not because cryptocurrencies became useful, but because they generated many profits for speculators and for the ecosystem that supports them.

Several banks have made private investments in cryptocurrency companies and many, including JP Morgan, invest in blockchainthe distributed ledger technology that underpins cryptocurrencies. A river of money from Entrance hall Encryption pushed the Congress create a regulatory framework in which cryptocurrencies, which had failed as an alternative to the dollar, could become a riskier and less regulated alternative to the stock market.

The fate of the cryptocurrency world

Today, marked by failures and scandalsIf cryptocurrencies are not accepted by the traditional banking system, it will take longer, if not forever, before they are fully accepted by the traditional banking system. The end of the banking crises made it necessary to replace private currencies with a single national dollar, the creation of the euro. Federal reserve as a lender of last resort, deposit insurance and comprehensive regulation.

However, it is not certain that the same recipe should apply to cryptocurrencies: effective regulation would eliminate much of the effectiveness and efficiency of cryptocurrencies.anonymity which explains its attractiveness. And while the US economy clearly needed a stable banking system and currency, it will do just fine without cryptocurrencies. ()

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