Document Type
Article
Publication Date
2024
Abstract
“Crypto Winter” refers to a systemic event that occurred in the cryptocurrency ecosystem—what we call “crypto space”—in 2022. Crypto space was wracked by plummeting crypto prices, the troubles of a large crypto hedge fund, and runs on many crypto lending platforms. Several large crypto firms went bankrupt. Collectively, everyday people lost billions of dollars. And crypto investors are still feeling the aftershocks.
We begin with two observations: First, despite mass marketing campaigns to the contrary, crypto lending platforms recreated and replicated traditional banking. They were vulnerable to runs because, like all banks, they borrowed short and lent long. This is the essence of banking, so we label these lending platforms “crypto banks.” Second, crypto space was largely circular. Once crypto banks obtained deposits and investments, these firms borrowed, lent, and traded mostly between themselves. As a result, Crypto Winter did not cause the kind of financial turmoil that we witnessed in either 2008 or 2020, nor did it cause an economic recession.
We then sound a warning for regulators. The next generation of crypto firms are linking up with the financial sector, which means their failures will spill over into the real economy. To contain the inevitable growth of systemic risk, regulators should use banking laws to address a banking problem.
Recommended Citation
Gorton, Gary B. and Jeffery Yufeng Zhang. "Bank Runs During Crypto Winter." Harvard Business Law Journal Review 14, no. 2 (2024): 297-338.
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