As the industry weathers a bear market that has wiped out $2 trillion, Bahamas-based crypto exchange FTX has given a $250 million loan to crypto lender BlockFi. Sam Bankman-Fried, CEO of FTX, is also the owner of Alameda Research, a quant trading firm that had extended a revolving line of credit to crypto broker Voyager Digital last week. Following this deal, the FTX token has seen a 9% increase in the last 24 hours.)
For crypto lenders, collateralising loans with digital assets worth more than the loan’s principal is a way to keep them solvent in a crisis.
However, these lending standards are not always followed because some lenders lend unsecured loans while others lend out the collateral backing loans. Collateralisation does not protect a lender from a borrower who is unable to meet margin calls in a market where the price of the collateral can drop dramatically at any minute.
FTX is now picking winners and losers in the crypto bear market. Analysts have compared the move to JP Morgan’s intervention to save the traditional financial system during the bank panic of 1907.
JP Morgan, along with John D. Rockefeller and then-Treasury Secretary George Cortelyou, provided several million dollars in loans to stop the bank run at the time. Morgan coerced New York banks into lending to brokerages in order to keep the New York Stock Exchange (NYSE) open.
The Federal Reserve was established in 1913 as the lender of last resort and the entity in charge of both credit and the supply of US dollars.
Unlike the 1907 bank panic, it is unclear whether the latest crypto crash will result in the formation of new centralised entities, but it does set a precedent for which companies the crypto markets will look to in the future to stabilise financial conditions. The more the crypto world tries to avoid reliance on the Fed, the more its biggest players will end up playing a similar role instead.