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DeFi and Credit Risk

Burn & Crash

You're not alone if the Great Crypto Crash of 2022 reminds you of something.

Blockchain specialist and author David Gerard argues in a contentious Foreign Policy editorial that this week's stunning cryptocurrency meltdown is strikingly similar to the 2008 financial catastrophe, which strangely predicted the growth of crypto in the first place.

"The economy was running hot" prior to the 2008 financial crisis, Gerard says, and corporations were eager to find a sensible place to put their money.

"To meet demand, financial engineers created'safe' dollar-equivalent products backed by assets like real estate, securities backed by real estate, or bets on securities backed by real estate," he says. "This worked until the housing market began to sag, at which point the chain of leveraged bets unraveled and threatened to drag the rest of the economy down with it."

According to Gerard, the current crypto catastrophe is not just similar to the 2008 financial disaster, but it could be considerably worse. "The same trend has just occurred in crypto," he claims, "but there is no asset as substantial as housing at the bottom of it."

History keeps repeating itself

While it's not the first time that the boom and bust cycle of cryptocurrencies appears to mirror similar tendencies in the stock market, these specific conditions — the hype, the bubbles, the creation of new products to meet the needs of new money, and the inevitable crash that followed — are arguably too uncanny to be ignored.

Gerard also points to another historical example for so-called crypto "stablecoins" — digital tokens whose market value is tied to fiat currency — that has proven out to be less than stable.

The announcement comes after Tether, the most popular stablecoin linked to the US dollar, hit an all-time low of $0.95.

"Stablecoins are a modern version of the 1800s' wildcat banks," he says, which produced dubious paper dollars backed by dubious reserves, leading to newly constituted federal agencies "taking away the power of commercial banks to issue paper notes."

"At the absolute least," the crypto expert continues, "stablecoins must be regulated in the same way that banks are." But bitcoin as a whole is a less resilient version of existing systems that only has an edge if it can avoid being adequately regulated."

Someone had to say it, and hopefully following the latest crypto crash, more people will heed. But, who knows, perhaps the next crypto boom and bust cycle is just around the corner.

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