- [Narrator] There's been a domino effect
in the collapse of the crypto industry.
(dominoes falling)
The fall of the stable coin Terra sparked a wave
of losses leading to bankruptcy filings
for five major crypto companies, paused withdrawals
and declining value for cryptocurrencies but-
- The contagion effects
to the wider economy have been limited
so there's like massive carnage over here
but not much impact over here.
- [Narrator] Usually when an industry collapses,
(dominoes falling)
it has the potential to ripple far out to other parts
of the economy and can even spark a financial crisis.
But so far, for crypto the fallout
has been pretty contained.
Here's why the crypto industries collapse
has happened in a closed loop.
(dominoes falling)
The finances of many crypto companies are intertwined.
- It's a very incestuous kind of scene
where you have the same companies lending to each other,
borrowing from each other, and then trading with each other.
- [Narrator] Just looking at a slice of the industry,
you can see how closely related
those five bankrupt companies were.
Three Arrows, a crypto focused hedge fund, had invested
in crypto assets and companies
and took loans out from other companies.
One of these investments was Terra's sister token Luna.
When these assets fell,
so did Three Arrows' balance sheet.
As a result, the company failed to repay debts
and was ordered to liquidate in June.
In the wake of that bankruptcy,
crypto lenders, BlockFi, Voyager
and Celsius were taking losses
on declining digital currency prices
and on loans they had given to Three Arrows.
Then Crypto Exchange FTX extended a line
of credit to BlockFi and its sister company
Alameda extended a line to Voyager.
Voyager filed for bankruptcy in July.
A few days later, Celsius did too
and when FTX filed for bankruptcy in November
due to a mismanagement of funds, BlockFi followed.
- It's like these companies are all wearing
these different hats with each other
so you can see how these companies are so interconnected
and so intermingled that it sets the stage
for contagion to have a really devastating effect.
- [Narrator] The Financial Stability Oversight Council
said in a report in October
that this interconnectedness is part
of why the industry can crumble so quickly.
One of the reasons those companies are so tightly linked,
traditional finance institutions have stayed
pretty separated from crypto.
For example, if you look at the list
of some of Celsius' biggest creditors
in their bankruptcy filing, there aren't any banks listed.
- In other industries, for example,
banks will provide credit lines or arrange corporate bonds
or do other sorts of financings.
In crypto it's been much more limited.
There just hasn't been
the same embrace that other industries have seen.
- [Narrator] A small handful of banks
like these have courted crypto companies,
but big players in the financial market
have been more hesitant.
- Okay, I'm a major skeptic
on crypto tokens, which you call currency like Bitcoin.
- [Narrator] Regulation for banks which is helped set
by the Office of the Comptroller of the Currency
requires them to have a number of safety measures
in place before engaging with digital assets.
- The resilience of the traditional banking system
to the recent events in crypto is not an accident.
Rather, it is due, at least in part
to federal bank regulators continued
and intentional emphasis on safety
and soundness and consumer protection.
- [Narrator] Crypto makes up just 0.01%
of exposure for banks.
- Since the traditional Wall Street banks have not
really participated in the space, it's been left
to the crypto companies themselves to act
as like defacto banks within the space.
You see how these companies have become so interconnected
and intermingled that the failure of one
can bring down the rest.
- [Narrator] But that isolation has helped prevent
the crypto crisis from spilling into the larger economy.
Think about the housing crash in 2007
that eventually led to the Great Recession.
When housing prices declined,
it sparked a crisis in subprime loans.
As some banks had a stake in these type of mortgages,
that crisis leaked into the traditional financial system.
- It began to snowball and cause a system-wide meltdown
and major financial institutions like Lehman Brothers
failed because of their exposure to the housing market.
- [Narrator] Other industries like housing
also have value in the economy.
There's dollars behind it,
but crypto's value is still mostly speculative.
- This is what happens when you have a lot
of money pouring into an unregulated industry
that has little discernible clear value
aside from the speculation itself.
- [Narrator] While the crash has been mostly contained
in this case, it's left a lot of questions
about how financial institutions might interact
with the industry in the future.