However, no taxpayer-funded help is generally on the cards for firms in difficulty in the crypto space, even for those might be regarded as "too big to fail". At present, the regulation of cryptoassets is primarily focused on anti-money laundering requirements and does not consider potential financial stability risks.Ī decade ago, major banks received government bail-outs during the credit crunch, with financial guarantees made to investors to restore public confidence, and consumers of regulated businesses having a level of protection through national compensation schemes. On the other hand, the regulation of cryptoassets remains in its infancy, even as links between the crypto and traditional financial systems increase and the potential risk to financial stability grows. Sweeping post-crisis reforms have since driven higher regulatory capital requirements, strengthened risk management practices, and made senior management more accountable. Traditional financial institutions are heavily regulated, with well-established risk management and consumer protections in place.
However, there are crucial differences between the banking and crypto sectors during their respective crises. The final sequence of events – a crisis of confidence, customers rushing to withdraw assets, and a terminal liquidity crunch – is likewise familiar from the last days of Northern Rock and others. Media reports suggest that opaque accounting practices, a failure to segregate customer assets, complex interdependent relationships between group entities, and overleveraging beyond risk limits are all potentially involved in FTX's failure. Details continue to emerge, but some of the problems which brought down the FTX group – which was regarded as "untouchable" by many within the industry – appear startlingly reminiscent of the 2007-2008 financial crisis. What has happened?įollowing the dramatic unravelling of crypto projects such as Terra and Celsius earlier in 2022, it has been the recent downfall of FTX, one of the largest cryptoexchanges in the market, that has made headlines. However, recent events have demonstrated that participants in the cryptoassets space can be vulnerable to many of the same issues that have plagued traditional financial institutions. Proponents emphasised the benefits of a decentralised, transparent monetary system, which is outside the control of governments and central authorities.
As cryptoassets become more widely used and their potential impact on financial stability grows, there is an increased recognition by policymakers of the risks posed to investors.įrom inception, cryptocurrencies in particular aimed to circumvent many of the problems associated with traditional banking institutions and systems.
2022 has been a challenging year in the cryptoasset industry, marked by ongoing instability and the collapse of several well-known players.
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