Since November of last year, cryptocurrency investors have collectively lost $2 trillion, and the list of victims of the ongoing crypto winter keeps growing.
The collapse of FTX, the second-largest cryptocurrency exchange in the world, which went bankrupt last month and sparked allegations that its former CEO was operating a “Ponzi scheme, which he has denied, only made the situation worse.
Currently, Mohamed El-Erian, the president of Queens’ College at the University of Cambridge, is issuing a warning that the absence of risk management observed in the cryptocurrency space may be a canary in the mine with wider economic implications.
What if the reckless risk-taking that we observe in the cryptocurrency industry was also present elsewhere, and cryptocurrency was just the structurally weakest of those cases? he posed this question
El-Erian believes that the crypto bear market is not yet a “systemic” risk to the financial system or the broader economy, but that there are signs of distress everywhere, including the near-collapse of the UK gilt market and emerging market debt crises in places like Sri Lanka.
What he is concerned about is that they’re just canaries. These are small fires, but the danger here is that they will spread and grow into something larger.
El-Erian claimed that some investors developed an aggressive and unsafe risk appetite as a result of the Federal Reserve’s near-zero interest rates and willingness to support markets during difficult economic times.
The economist, who formerly held the position of CEO of PIMCO, claimed that although the banking industry was subject to strict regulation following the Great Financial Crisis of 2008, the risk in the entire financial system didn’t simply vanish.
According to him, It relocated. It moved from banks to non-banks. And non-banks are less well-regulated, less well-supervised, and less well-understood by regulators.
Pension funds and other non-bank financial institutions owe about $25 trillion in debt, which is essentially “hidden” from regulators, the Bank of International Settlements warned earlier this month.
Standard debt statistics ignore this off-balance sheet dollar debt, which presents unique policy challenges, according to BIS researchers. Therefore, policies to restore the smooth flow of short-term dollars in the financial system are established in a fog during times of crisis.
El-Erian stated that his greatest concern is that reckless behaviour at non-banks will result in “financial accidents” that “spill back into the real economy.”
In 2008, when the banking system collapsed, we saw how bad that world could get, he said. He doesn’t believe it gets that bad, but he is concerned that this will be yet another barrier to strong, long-lasting, and inclusive growth. And we urgently require rapid, strong, and inclusive growth.
