The crypto market seems to have priced in last year’s string of crypto company bankruptcies. But the crypto firms that survived will still be paying off bank loans to cover their positions for some time.
Crypto prices continue to edge upward while the market bears and bulls regroup.
Even the recent bankruptcy of Genesis hasn’t dampened crypto investors’ enthusiasm.
Meanwhile, at least two banks with a high-profile roster of cryptocurrency companies for customers are staying afloat with money from home loan banks.
That may be a bullish signal for cryptocurrency in the big-picture view. It could signal traditional finance appetite for crypto exposure despite the risks. It is also, however, a source of consternation for economic planners and regulators.
They are concerned that the growing connections between the crypto sector and traditional finance pose “contagion” or “spillover” risks that could endanger the entire economy.
It was this kind of over-sophistication of financial markets that led to the financial crisis in 2008. Ironically, that happened as a result of the housing market crash that started in 2007.
A web of connections and fixed-income derivatives (just a kind of smart contract without the blockchain) left the entire economy vulnerable when home prices cratered.
According to a recent report in the Wall Street Journal, crypto banks have taken billions in loans out from home loan banks to cover their shortfalls.
The United States Federal Home Loan Banks System (FLHB) has loaned out billions of dollars to two major crypto banks. The organization was originally founded amid the Great Depression to support home lending.
Signature Bank is one of them. Silvergate is another. Both are tradfi companies that made the pivot to do business with crypto but still qualify for home loans.
Even though they technically qualify, their losses over the past year came from crypto, not housing. The loans they’ve taken out from FLHB may be correct on paper, but they almost certainly support its high-risk, high-reward activities in crypto.
This is the sort of creative banking that causes the spillover risks that worry financial regulators. They are concerned this kind of multiple-role financial business models create technicalities that destabilize the financial system.
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