The market seems to have priced last year’s string bankruptcy of crypto companies into its calculations. However, the crypto companies that survived will continue to pay off their bank loans for a while.
While the market bulls and bears regroup, crypto prices continue to rise.
The enthusiasm of crypto investors has not been dampened by the bankruptcy of Genesis.
Regulators are worried
At least two banks that have a prominent roster of cryptocurrency companies are still able to borrow money from their home loans banks.
This could be a bullish sign for cryptocurrency in the long-term view. This could indicate traditional finance’s willingness to take on crypto exposure, despite the risks. However, it is a source for concern for regulators and economic planners.
They fear that the increasing connections between crypto and traditional finance could lead to “contagion” or “spillover” risks that could threaten the whole economy.
This kind of over-sophistication in financial markets led to 2008’s financial crisis. Ironically, this was caused by the 2007 housing market crash.
The entire economy was vulnerable to the collapse of home prices due to a web of connections and fixed income derivatives (just one type of smart contract without blockchain).
Two Crypto Banks are Exempted from the US Home Loan System
According to a Recent report According to the Wall Street Journal crypto banks have borrowed billions from home loan banks in order to pay their shortfalls.
Two major crypto banks have been loaned billions of dollars by the United States Federal Home Loan Banks System. This organization was initially established in the Great Depression to help with home lending.
Signature Bank is one example. Silvergate is another. Both of these tradfi firms made the pivot to do business using crypto, but they still qualify for home loan approvals.
Although they are technically qualified, the losses they have suffered over the past year were not due to housing but crypto. Although the loans they took out from FLHB are correct on paper, they almost certainly support FLHB’s high-risk, high reward activities in crypto.
Financial regulators are concerned about this type of creative banking. These regulators are concerned that this type of multi-role financial business model creates technicalities that could destabilize financial systems.