Placeholder Image

Subtitles section Play video

  • - [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.

- [Narrator] There's been a domino effect

Subtitles and vocabulary

Click the word to look it up Click the word to find further inforamtion about it