The crypto market appears to have factored in last year’s string of crypto firm failures. However, the crypto companies who survived will continue to pay off bank debts in order to cover their positions for some time.
While market bears and bulls regroup, cryptocurrency prices continue to rise.
Even Genesis’ recent bankruptcy hasn’t tempered crypto investors’ enthusiasm.
Regulators are concerned.
Meanwhile, at least two banks with a high-profile customer record of bitcoin startups are remaining afloat with funds from home loan institutions.
In the long run, this might be a bullish indication for bitcoin. Despite the risks, it could indicate traditional finance’s enthusiasm for crypto exposure. However, it is a source of concern for economic planners and regulators.
They are concerned that the expanding links between the crypto industry and traditional banking would cause “contagion” or “spillover” dangers that will jeopardize the overall economy.
This oversophistication of financial markets contributed to the 2008 financial catastrophe. Ironically, this occurred as a result of the 2007 housing market meltdown.
When property values fell, a network of links and fixed-income derivatives (basically a type of smart contract without the blockchain) exposed the entire economy.
Two cryptocurrency banks are bailed out by the US home loan system.
According to a recent Wall Street Journal investigation, crypto banks have borrowed billions of dollars from home loan institutions to offset their shortages.
The Federal Home Loan Banks System (FLHB) of the United States has made billions of dollars available to two big crypto banks. The group was created during the Great Depression to help with home finance.
One of them is Signature Bank. Another is Silvergate. Both are trading firms that took the decision to do business with cryptocurrency while still qualifying for home loans.
Even though they technically qualify, their losses in the last year have come from cryptocurrency rather than housing. The loans they obtained from FLHB may be correct on paper, but they very likely fund FLHB’s high-risk, high-reward crypto activities.
This is the type of innovative banking that raises the concerns of financial regulators. They are concerned that financial company models with various roles may develop complications that will undermine the financial system.
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