Cryptocurrency Exchanges

Crypto market cap peaked just below $3 trillion last year, compared with over $40 trillion in each of the US stock, bond, and housing markets, and crypto leverage is largely confined to the crypto system itself so spillovers are limited.

Collapse of THIS intermediary will have little systemic effect because large banks and other intermediaries were smart enough to stay out, and no "contagion" of trust in real finance. No overall wealth lost either. For each dollar one loses on crypto, another gains.

The lack of transparency and poor governance may reduce confidence in the crypto to consumer businesses. This could have links to the rest of the financial system both directly and through household liquidity.

No significant connection with traditional financial intermediation. The loss of real assets is small, because there was never much in the way of real assets to be lost.

There is little visibility into the activities and interconnectedness of crypto exchanges at this point. Traditional financial institutions with central positions can have a large impact relative to their size, and even there it can be difficult to see their risks.

Question asks about one crypto bankruptcy. If it stops at just one bankruptcy, I think there will be an impact and that impact will be modest.

Currently, this is a niche space and there are relatively few connections to traditional finance. The spillovers will likely be limited to other centralized firms dealing with crypto such as Genesis.
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Banks do not have exposure to crypto asset class yet.

"The FPC continues to judge that direct risks to the stability of the UK financial system from cryptoassets and DeFi are currently limited." See the report for all the reasons, plus notice what has been going on the last month. Crypto collapse, economy not much affected
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Crypto is largely distinct from most of the traditional financial system and although the collapse of FTX has unfortunate consequences for a number of investors, their losses are unlikely to trigger any type of threat to financial stability.

At this point, crypto represents a reasonably small fraction of the world economy and it is not tightly integrated into traditional finance channels. This of course could change in the future

so far not especially interconnected, but that could change down the road

At the current scale and level of usage, crypto does not seem systematic enough to cause major issues to the wider financial system. But my level of uncertainty is high since I am not an expert on the issue and have not seen a detailed data analysis.

Crypto does not interact with the wider economy directly. Current data and events suggest that the traditional financial system is not very exposed to crypto either, although one always worries about hidden linkages.

Not enough transactions occur yet through crypto currency IMHO to make a serious impact, and with viable substitutes for transacting I don't expect much impact from this event.

Cryptocurrency deposits are not used to fund loans on which business and people depend. There are no effects on the real economy beyond the layoffs from the firms in question, like if a casino were to go bankrupt.

Institutional adoption of crypto is still limited, therefore there is little chance of contagion. I note that retail investors may lose substantial amounts.

The scale of crypto is too small to affect the stability of the financial system.

So far so good, as long as the breach of trust does not extend to more exchanges/products affecting much larger base of investors.

For now. What’s stopping large intermediaries and non-banks from taking a position? There could be broader effects if that occurs, though not large enough relative to big banks.

I don't think we know enough about the exposure of various financial market participants to these exchanges.

Given opacity of the crypto universe, I am not sure who is exposed.

FTX had about $16 bi in client assets, which is like a medium-sized bank. The system can withstand a bank run of this size. Wider damage to crypto eco-system may ensue, but the entanglement with the broader levered financial sector seems contained.
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The case for crypto regulation is a consumer financial protection case, not a financial stability case at this point. Crypto regulation is also needed to prevent scams and frauds from deterring the deployment of capital to finance legitimate fintech innovation.

Regulation is not "more" or "less," it is smart or dumb, effective or ineffective. FTX was in Bahamas precisely to avoid regulation. No systemically important US institution is affected. US regulation worked. Yes, fraud. But caveat emptor. People have to be free to lose money.

Some more supervision and regulation is needed to avoid fraud. It is not clear how the regulation can be structured to be effective but not counterproductive within the existing agencies around the world.

Investor protection is important. Moreover, some day, there could be contagion between this unregulated market and the real economy and financial system.

I would say transparency rather than a specific form of regulation, at the start. Informed decisions require visibility into the firm, and additional information to support consumer protection and governance.

At the same time, some crypto should remain regulation-free (except that e.g. banks shouldn't be allowed to hold them, even indirectly), to preserve room for beneficial innovation

FTX/Binance are offshore because many of the tokens they trade are securities (like tokenized GameStop). Regulatory oversight will be tightened on the U.S. exchanges (FTX.US also bankrupt). Coinbase (no offshore ops) is an obvious winner here as well as DEXs like Uniswap.
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Why would crypto be different from any other asset class.

For consumer protection maybe there need to be some more rules, but not yet for stability. Plus Cecchetti and Schoenholtz make a strong case for "letting crypto burn".
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FTX is just one illustration that there is a need for regulatory oversight, primarily related to disclosure of the risks involved in these investments.

Regulation can increase trust in an asset class, as fraud decreases. The decrease in expected fraud can engender further growth in the asset class. Historical examples abound.

I do not think it is the collapse per se (even under optimal regulation one might still want some collapses to occur), but the reasons for the collapse that point to the need for tighter regulation.

Depends on the type and implementation of regulation. Existing regulations already cover crypto to some degree (e.g. fraud). Tighter regulation may make crypto more systemic by tying it closer to the traditional financial system. It may also increase chances of crypto bailouts.

I don't know about the "need" but I am willing to bet that regulation will happen.

Participants in this space are learning that absence of supervision and regulation means that scammers are running the show. If anything in this sector survives, it will be under some form of tighter regulation.

On the one hand, don't regulate and let crypto intermediaries continue to fail, as most have been doing. On the other hand, ban them because they serve no economic purpose: the entire value proposition of crypto is regulation-free, institution-free, blockchain-based money.

Intermediaries, irrespective of what they intermediate, should have oversight — either internal boards or regulation.

Small investors are getting harmed. Appropriate regulation would mitigate these and other problems.

FTX offered deposits. It seems that FTX was transferring to Alameda some deposits with no knowledge of the clients. The product was accessible widely. Of course, this should be a regulated product. Unclear yet how much they circumvented regulation (fraud) or it was permissible.

Need to spell out the need for regulation and how it will be done. For retail consumers? Who is investing in these assets? Aren’t buyers beware? Which regulator will do the regulation and how (across border)? Are we keeping the balance between adequate innovation vs. regulation?

Yet to see how cryptocurrencies provide a net benefit to society.

It is not clear why the collapse of an offshore exchange should imply regulation of the underlying asset, nor is it clear how such regulation would work.

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An institution claiming to intermediate or issue a type of "money" can be dangerous, and unfortunately private sector actors have not proven willing or able to discipline such intermediaries.

The lack of corporate controls, auditing, and regulatory oversight in the case of FTX was stunning. Many retail investors, who placed their money and trust in the system, have lost substantial sums. More regulation is needed to offer basic investor protection.
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