Can the crypto attachment infect mainstream finances?

The crypto-engaged has a silver lianstore on the horizon: the wider financial system has been spared so far.

from Brussels to Washington Financial guards are playing the risk of turbulence spread to other markets and argue that their own measures have protected the banks from crypto-tail spin.

"This infection did not extend to the traditional banking and financial sector," said the incumbent US currency examiner Michael HSU of the Financial Times.

"This is at least partially due to the continued and deliberate emphasis on security, solidity and consumer protection by the Bundesbank supervisory authorities," he said.

On Thursday, the global supervisory authorities in Basel went one step further and suggested stricter rules to limit crypto engagement to 1 percent of the assets of a bank.

The Federal Reserve, which recently published the results of its annual stress tests, show that the largest US banks have losses of more than 600 billion

Outside of the banking sector, Firewalls contain investment guidelines for institutional investors who limit their commitment to digital assets, an official from the Securities and Exchange Commission.

The official added that there were no signs that the crypto sale had triggered a rush to cash from investors, looking for the withdrawal of traditional securities to cover losses in crypto, even though the SEC still monitored this activity.

"For mainstream assets administrators, the direct effects of crypto sales are quite low," said Anne Richards, Managing Director of Fidelity International. "Bitcoin has found its way into a small number of institutional portfolios, but for most groups it is still very margin."

Andrea Enria, the Supreme Banking Supervisory Authority of the European Central Bank, said on Thursday before a committee of the European Parliament that there was "still very limited" connections between crypto and banks.

"But I notice an increased interest of the banks to perhaps in these markets because they see a potentially very interested younger audience..

Paschal Donohoe, Irish finance minister and President of the EURO -BRUCKE MINATION, said that the officials were not worried at the moment, but added: "I can imagine that in a year we will concentrate on cryptocurrencies as well as on climate risk. This is one of our main concerns."

Great regulated banks have found paths to offer their customers crypto products. JPMorgan Chase from Jamie Dimon helps the crypto bonds Coinbase and Gemini with deposit and withdrawal transactions; Goldman Sachs sold derivates coupled to Bitcoin and granted coin base a loan that is secured against Bitcoin; And many banks offer wealthy investors access to crypto investment funds.

Smaller US loans have dealt more intensively with crypto and advertised by customers of digital assets such as stable coin issuers, crypto exchanges and traders. This includes the Signature Bank, which according to its own information is more than a quarter of its deposits of around 120 billion

According to a report by Morgan Stanley and Oliver Wyman, banks have been in the hat to dive too deeply, more than 95 percent of the estimated income of $ 4 to $ 5 billion for company and institutional customers that were generated in 2021 by digital assets.

"Banks have to go where the customers want to have.

In the absence of banks, special crypto loans have occurred for lending. These companies usually fall into two categories: decentralized lenders such as AAVE, in which the financing activities are pursued in the blockchain, and centralized lenders such as Blockfi and Nexo.

A low direct engagement at banks would make it less likely that they act as a transmission channel for financial burdens from the crypto crash, as they did in 2008, according to Jeff Berman, partner of Clifford Chance.

"Banks do not hold cryptos and they were very careful when lending against crypto. And in fact most of the lending against crypto was carried out by crypto specialists. The overall exposure to crypto is therefore low," said Berman.

crypto hedge-fund insider also seem to be relaxed about the extent to which this could have an impact on traditional bank prime brokers and the wider financial system.

Since most of the traditional bank prime brokers who serve mainstream hedge funds have not yet entered the crypto sector, crypto funds tend to use specialized brokers for digital assets, although they still use banks when they still act with mainstream systems. This is seen as a restriction of the potential for banks to make major losses when a fund explodes.

"I don't see that this will spread to the traditional financial world," said Edouard Hindi, Chief Investment Officer at the digital asset manager Tyr Capital. "The risk [of contagion] what exists in the traditional financial world does not exist in crypto."

In the meantime, many large macro and quantitative hedge funds that started trading with crypto have done this with futures, for example at the Chicago Mercantile Exchange, instead of the underlying cryptocurrencies themselves.

If you suffer losses in such positions, you should have "had more margin at the CME or accept cash loss in the Defi exchanges," said Usman Ahmad, Managing Director of Zodia Markets, a trading center for digital assets in the possession of Standard Chartered.

Both should not affect Bank Prime Broker, unless these losses mean that the fund is unable to meet additional demands on banks that act as brokers for the other assets of the fund, he added.

All of this has meant that some heavyweights from Wall Street have already come to the conclusion that the crypto chaos is not a systemic risk of banks.

"I don't think it's big enough to be systemic," said Howard Marks, co-founder and co-chair of Oaktree Capital Management. "In order to have a systemic effect, it must be part of the system and institutions in my opinion."

calming statements by the regulatory authorities were not always forward-looking, especially in the run-up to the Subprime real estate crisis in 2008, as government officials played down risks. And this time not everyone is calmed down.

"I think the systemic infection due to a crypto crash is real, although it is difficult to say how deeply the digital currencies with hedge funds and other traditional financial companies are intertwined," said David Trainer, Chief Executive of the investment research company new constructs.

"During the sale, we will soon find out how high the systemic risk is."

by Joshua Franklin in New York, Stefania Palma in Washington, Laura Noonan in Brussels and Scott Chipolina, Laurence Fletcher, Harriet Agnew and Owen Walker in London