What cryptocurrencies can learn from the age-old crisis – POLITICO

With the help of Derek Robertson and Sam Sutton

We wrote about parallels between the early stages of the ongoing financial collapse of cryptocurrencies and the latest global financial crisis. But within the industry, the historical precedent for selection dates back much earlier—115 years to be exact.

What happened next?

The Panic of 1907 followed the failure of an attempt to corner the copper market. Worried savers rushed to take cash from New York trust companies that lent money to copper speculators.

One of the largest trust companies in the city collapsed, and because the financial firms were so intertwined, panic and bank failures spread throughout the country. The worst of the crisis ended when banker JP Morgan stepped in to arrange loans for several troubled banks, restoring faith in the system.

In very general terms, the current crisis has so far been “nearly identical” to the 1907 crisis, according to Rashid Saleuddin, a crypto-observer with a PhD in financial history from the University of Cambridge who specializes in the panic period.

This time around, losses in speculative crypto businesses have shaken faith in the crypto lenders they borrowed from, and a similar rush to withdraw deposits.

If you are looking for personal parallels: Sam Bankman-Fried, founder of cryptocurrency exchange FTX, plays the role of Morgan, providing loans and investments to troubled businesses.

In a broader sense, the 1907 precedent This is due to the widespread belief among crypto enthusiasts that the industry is experiencing the last few centuries of the evolution of financial markets at an accelerated pace.

So it’s worth seeing what came out of Panic. As it turns out, the crisis was largely responsible for the creation of the Federal Reserve six years later.

After the panic, Congress set up the National Monetary Commission to find out what financial reforms would prevent this from happening again. Its chairman is Rhode Island Sen. Nelson Aldrich, a Republican, convened a secret meeting on Jekyll Island, Georgia in November 1910, at which commission members and New York bankers, still frightened by the chaos of 1907, agreed on a plan for a central bank whose responsibility was to take emergency measures. . loans to member banks.

Aldrich’s resulting proposal for a National Reserve Association failed amid criticism that its structure was in the best interests of the bankers. In 1913, Congress passed the Federal Reserve Act, which was similar in many ways to Aldrich’s proposal but gave the president more power to oversee the system through appointees.

So… are crypto finance firms going to join the Federal Reserve?

Do not count on it. At least not for those who are committed to the original ideal of cryptocurrency, which was supposed to challenge the marriage of the state and the financial system embodied by central banks. For the true believers in cryptocurrency, this would be something of an admission of defeat. They want to replace the Fed, not join it.

The Fed is also not enthusiastic about this idea. This blocks crypto firms from joining the Federal Reserve – Chairman Jerome Powell said he was in take your time to set this precedent — although legislation proposed by Senators Kirsten Gillbriand, DN.Y., and Cynthia Lummis, R-Wyo., would grant some crypto firms Access to It.

What about a cryptocurrency-only substitute for the Fed—some institution dedicated specifically to stabilizing the sector?

Sometimes, in the absence of a government-sanctioned central bank, banks merged to create private clearing houses, such as Suffolk Bank in Boston in the 19th century, who acted as lenders of last resort.

But don’t count on anything like that either. Saleuddin, who is now head of research at Blockworks, a crypto-centric media firm, said he believes today’s crypto industry is too fragmented to create something like this. Instead, he says, history shows that instead of regulation, market participants will reduce risky behavior on their own. But only for a while.

“Markets have a short memory. So what comes next could be another crisis in a few years,” said Saleuddin. “Though given it’s a cryptocurrency, it could be sooner.”

In other words, when it comes to the long-term effects of the crisis, we don’t know exactly if history will repeat itself and how it can rhyme. But given the speed at which the crypto world is moving, we will know about it sooner rather than later.

Cryptocurrency lender Celsius Network heads for possible bankruptcydecentralized finance (DeFi) platforms are about to lose one of their biggest customers.

Crypto research company Arkham Intelligence has new report highlighting the bad business, bad trades, and alleged ethical lapses that caused Celsius to freeze its clients’ assets last month, precipitating a cryptocurrency liquidity crisis that set fire to established brokerage and lending platforms.

Celsius positioned itself as a bridge between traditional (i.e. centralized) financial systems and DeFI. It uses customer deposits to issue crypto loans and collateral for high-leverage staking on decentralized trading and lending platforms such as AAVE, Compound, and Maker.

While DeFi platforms are ostensibly decentralized—they rely on code-based systems to issue and service overcollateralized cryptocurrency loans—the institutions that fueled demand for these services were anything but.

According to Arkham, Celsius funds accounted for roughly 9 percent of the total value on major DeFi platforms by the time they shut down their users’ accounts — a level of concentration that had already attracted the attention of top Federal Reserve officials.

“It has become clear that the crypto ecosystem is highly interconnected as many small traders, lenders and DeFi protocols have focused their efforts on these big players,” said Fed Vice Chairman Lael Brainard. said in a speech on Friday. “We have seen how decentralized lending based on over-collateralization instead of intermediation can serve as a stress enhancer, creating liquidation waves as prices fall.”

In other words, even if DeFi platforms are “decentralized,” large borrowers have relied on these networks to the point of causing market contagion after their positions were wiped out.

DeFi proponents point out that, at least from their point of view, decentralized credit pools worked as they should. Celsius was unable to meet the terms of its loans and immediately lost access to the cryptocurrency it had placed as collateral. This is exactly what was supposed to happen, and as a result, DeFi protocols have proven to be better than more centralized lending companies.

However, this is little consolation for retail traders who have been looking for access to enticingly high returns through the Celsius platform. And while the company has had some success in winding down its positions — it has reportedly released about $500 million of collateral it placed with Maker over the past week — the ongoing liquidity crunch is likely to dampen enthusiasm for DeFi in the near term.

“There will be a chilling effect,” Miller Whitehouse-Levin, policy director at think tank DeFi Education Fund, said, noting that Celsius’s troubles, as well as those of Voyager Digital, another crypto lender, have already prompted traders to abandon their cryptocurrencies. from accounts on centralized platforms and to their own wallets.

As companies like Celsius shrink, it also raises questions about how DeFi platforms can eventually scale to any meaningful size.

“For most financial systems, if you take out the biggest players, everything collapses,” said Arkham CEO Miguel Morel. If it wasn’t for Celsius’s demand for large loans, “perhaps many of the various stakes and things that have generated so much growth in DeFi platforms over time would have been removed.” – Sam Sutton

Back in May we covered luxury watch brand TAG Heuer’s entrance to the crypto worldand the natural marriage of this industry with NFT market.

Since then, however, the luxury watch market has been hit hard, and cryptocurrency itself is partly to blame. Andrea Felstead of Bloomberg indicated that the secondary market value of Patek Phillipe, Audemars Piguet and Rolex models, which experienced the most astronomical price spikes during the crypto boom, suffered an accompanying collapse. The supply-to-scarcity ratio that defines the existence of this market prevails, but the downturn is a reminder that the feverish highs of the Cryptocurrency Peak power did not reflect the real value of any given technology or currency.

However, luxury brands are basically moving forward steadily in their efforts to marry crypto – not just in the watch world, but in the world as well. high-fashionas a company like Balmainand Prada recently announced their own NFT lines. The newspaper “New York Timesreported last monthamid the darkest days of the crypto downturn this summer, Swiss watchmaker Panerai plans to authenticate all of its watches via NFT by next year.

If the financial value of crypto products has declined across the board, their perceived value as a marketing tool remains decidedly stable. – Derek Robertson

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Stay in touch with the entire team: Ben Schrekinger ([email protected]); Derek Robertson[email protected]); Konstantin Kakaes (ur.[email protected]); and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.

Ben Schrekinger writes for POLITICO on technology, finance and politics; he is a cryptocurrency investor.

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