Why Crypto’s Crash Hasn’t Spilled Into Other Markets

 The fall of the stablecoin Terra sparked a wave of losses leading to bankruptcy filings for five major crypto companies, paused withdrawals, and declining value for cryptocurrencies but-The contagion effects to the broader economy has been limited. Hence, there's like massive carnage over here but not much impact over here.

The Financial Stability Oversight Council said in a report in October that this interconnectedness is part of why the industry can crumble so quickly. One of the reasons those companies are so tightly linked, traditional financial institutions have stayed pretty separated from crypto. For example, if you look at the list of some of Celsius' biggest creditors in their bankruptcy filing, there aren't any banks listed.

In other industries, for example, banks will provide credit lines or arrange corporate bonds, or do other sorts of financings. In crypto, it's been much more limited. There just hasn't been the same embrace that other industries have seen.

A small handful of banks like these,

have courted crypto companies, but big players in the financial market have been more hesitant.

The resilience of the traditional banking system to the recent events in crypto is not an accident. Rather, it is due, at least in part to federal bank regulators' continued and intentional emphasis on safety and soundness, and consumer protection.

Crypto makes up just 0.01% of exposure for banks.

Since the traditional Wall Street banks have not really participated in the space, it's been left to the crypto companies themselves to act as like defacto banks within the space.
You see how these companies have become so interconnected
and intermingled that the failure of one
can bring down the rest.

But that isolation has helped prevent the crypto crisis from spilling into the larger economy. Think about the housing crash in 2007 that eventually led to the Great Recession. When housing prices declined, it sparked a crisis in subprime loans. As some banks had a stake in these type of mortgages, that crisis leaked into the traditional financial system.

Other industries like housing also have value in the economy. There's dollars behind it, but crypto's value is still mostly speculative.

While the crash has been mostly contained in this case, it's left a lot of questions about how financial institutions might interact with the industry in the future.