Is FTX the Federal Reserve of crypto? — Quartz

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The cryp­tocur­ren­cy indus­try some­times mar­kets itself as an alter­na­tive to the tra­di­tion­al finan­cial sys­tem and its depen­dence on the US Fed­er­al Reserve, but this week cryp­to investors are learn­ing how use­ful it is to have a lender of last resort.

As the indus­try weath­ers a bear mar­ket that’s destroyed $2 tril­lion, Bahamas-based cryp­to exchange FTX gave cryp­to lender Block­Fi a $250 mil­lion loan. The head of FTX, Sam Bankman-Fried, also owns quant trad­ing firm Alame­da Research which last week extend­ed a revolv­ing line of cred­it to cryp­to bro­ker Voy­ager Dig­i­tal last week. (Cryp­to mar­kets are hap­py with the deal: In the last 24 hours, the FTX token is up near­ly 9%). 

Col­lat­er­al­iz­ing loans with dig­i­tal assets that are worth more than the prin­ci­pal of the loan was sup­posed to keep cryp­to lenders sol­vent in a crisis. 

These lend­ing stan­dards aren’t always fol­lowed, how­ev­er, as some lenders offer unse­cured loans and oth­ers lend out the col­lat­er­al back­ing loans. Col­lat­er­al­iza­tion also doesn’t save a lender from a bor­row­er who is unable to meet mar­gin calls in a mar­ket where the price of the col­lat­er­al plum­mets suddenly. 

FTX’s CEO is now choos­ing win­ners and losers in the cryp­to bear mar­ket. The move is not unlike when JP Mor­gan stepped in to save the tra­di­tion­al finan­cial sys­tem dur­ing the bank pan­ic of 1907, ana­lysts have not­ed on Twitter. 

At the time, JP Mor­gan along with John D. Rock­e­feller and then Trea­sury Sec­re­tary George Corte­ly­ou pro­vid­ed sev­er­al mil­lion in loans to stop the bank run. Mor­gan strong-armed New York banks to lend to bro­ker­ages to keep the New York Stock Exchange (NYSE) open.

The Fed­er­al Reserve was born in 1913 as the lender of last resort and as the enti­ty that con­trolled both cred­it and the sup­ply of US dollars. 

Unlike the bank pan­ic of 1907, it’s not clear that this lat­est cryp­to crash will result in the cre­ation of any new cen­tral­ized enti­ties, but it does set a prece­dent for which com­pa­nies the cryp­to mar­kets will look to in the future to sta­bi­lize finan­cial con­di­tions. The more the cryp­to world tries to avoid depen­dence on the Fed, the more its biggest play­ers will end up play­ing a sim­i­lar role instead.



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