[xibalba]

How is crypto a systemic risk?

From my recollection of the 2008/09 financial crisis, systemic risks were those in which entities were deeply intertwined with one another on a massive scale, such that there failure would potentially bring down the entire system of finance. We're talking: retail banking (payments, savings, lending), commercial banking (idk?), public debt markets (bigco and gov funding), but most especially short term commercial funding. Again, going on memory, failure of short term funding (repo (?)) markets would have caused real, non-finance companies to become insolvent or at the very least massively impair their working capital positions. This has the knock on effect of reducing demand throughout their supply chains and major cost cutting (job loss). Etc etc. In other words, massive recession or even deep depression.

Crypto, on the other hand, seems to be mostly a casino, a big one, yes. But one that is not deeply intertwined with other parts of the financial system. Coinbase, for instance, is not systemically important. It doesn't (yet) have tendrils in so many important lines of business as did the megabanks of yesteryear.

[mlac]

When that much money goes “poof”, it’s going to have real world consequences. And the people who are going to get burned are the last ones on the bus - the least technical, the ones who think it will make them rich, the ones who can’t afford it.

[SilasX]

Yes, but the parent's point (and my concern as well) is that "market crash" does not necessarily mean widespread fallout (e.g. Black Monday in '87); that only happens when the losers are tightly coupled to other critical parts of the economy, which isn't necessarily the case here: GS/JP Morgan won't have to default on loans to critical counterparties in a crypto crash, for example.

Any time a big group loses wealth all at once, there's some consequence, but that's not the same as "systemic risk" where it causes catastrophe in areas not directly related.

[mlac]

It’s becoming widespread with all of the apps, super bowl ads, and reduced friction in getting into crypto “investing”.

It used to be people who purchased crypto had to know what they were doing (and know the risk). Now anyone can buy crypto without any understanding of anything after seeing a 30 second commercial about smart investing.

[SilasX]

Again: being widespread is not the same as being a systemic risk. That just means it's a casino everyone wastes money in. Who is defaulting on critically important obligations because of a crypto crash? What creditworthy business isn't getting a loan to cover cash flows for the quarter because BTC fell to 10k?

[mlac]

If it gets bad enough, it will increase the number of consumers who are defaulting on credit cards, mortgages, auto loans, and student loans.

[vietthan]

likely not, the dotcom bubble was a big deal but it wasn't catastrophic like 2008 was and that's because of the greater coupling with financial institutions.

[xibalba]

I think you're not understanding. While a bunch of people losing money is bad, it wouldn't create another Great Depression, per se. A huge investment bank with millions of counterparties going under absolutely could cause massive, long term damage to both the financial markets and the real economy. For example, people losing their hats in crypto wouldn't cause commercial paper markets to dry up. A big IB going down almost did in 2008. That would have resulted in huge businesses that employed, collectively, millions of people becoming effectively insolvent. Now you're talking about a Great Depression. Big difference. This is where the keyword "systemic" comes into play–as in, this entity is a critical node in the system. Its collapse could jeopardize the system.

[mlac]

Anyone with a smart phone can now spend their life savings on crypto or sports betting with almost zero friction.

We have a trillion each in student loans, auto, and credit card debt. Those (besides student loans) have requirements for credit worthiness. So those people were screened and some weren’t allowed to take on debt.

Not handled well (or ignored because it’s not viewed as a systemic risk), it’s a non-negligible portion of the population that is financially wrecked and unable to meet their debt obligations. And we can’t just make policy that says the idiots that blew their money on gambling and crypto don’t need to pay back their debt… it gets ugly fast.

[pjc50]

If the Tether people are to be believed, there is $80bn of "cash" that's held "somewhere" (neither investors nor investigators are clear where). That may turn out to evaporate. Allegedly it has come from "institutional investors" (which ones?)

On the other hand, it's still not up to the size of Lehman ($600bn!). It's heading there.

[xibalba]

The difference (systemic vs non-systemic) is not just about magnitude, but also in who Lehman's counterparties were and the effects when those counterparties (those who were exposed to Lehman) could not get their expected capital (and the chain reaction of events that sets off throughout the capital markets and then the real economy). I remember reading some stat that claimed Lehman had derivative contracts with total notional value in the 10s of trillions.

[l-lousy]

It may be that the original poster meant that it may upend and take over the current system if the Govt can’t regulate it in some way