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Speaker 1: Let's say you, my next guest, Jonathan Rose, Chicago FED

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Speaker 1: Economic Advisor, can help shed some light on what shaped

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Speaker 1: the sentiment. Certainly last year, Jonathan, really appreciate you joining.

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Speaker 2: Us here on the program.

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Speaker 1: And you and the Chicago Fed conducted the study to

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Speaker 1: see how fast the crypto run happened in twenty twenty two,

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Speaker 1: and I think more importantly, you know how large it

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Speaker 1: actually was. We all covered Celsius and Voyager, those collapses

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Speaker 1: and FTX to kind of crowned off, but we have

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Speaker 1: never really gotten our hands around a number. Have you

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Speaker 1: been able to quantify, Jonathan to Chicago Fed what happened?

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Speaker 2: Yeah, that's right, Thanks for having me.

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Speaker 3: And so in addition to the firms you named, we

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Speaker 3: also looked at Blockfi and Genesis, and you'd use bankruptcy

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Speaker 3: documents to characterize the outflows that they had just before

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Speaker 3: their failures in twenty twenty two. You know, what we

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Speaker 3: saw is a classic financial crisis. We saw billions of

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Speaker 3: dollars flowing out in the most extreme instan said FDx,

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Speaker 3: it was within just a few days. At the others,

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Speaker 3: it was over the course of a week or two.

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Speaker 3: And you know, the investors that were able to leave.

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Speaker 3: They left at one hundred cents on the dollar. The

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Speaker 3: ones that didn't there are still creditors to the bankruptcy estate,

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Speaker 3: as you know, so there were you know, this is

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Speaker 3: an important policy issue that we thought we needed to

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Speaker 3: look at because of the serious lapses and investor protection

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Speaker 3: that we saw with you know, the instances of these

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Speaker 3: firms offering ten to fifteen percent returns on certain investments

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Speaker 3: and making risky investments in firms like three Yuros Capital

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Speaker 3: or in the Terra Luna projects and suffering losses and

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Speaker 3: causing some of their investors to flee.

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Speaker 1: So what was the number that you found? You looked

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Speaker 1: at Celsius, Voyager, Block five, Genesis FTX. When you aggregate

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Speaker 1: all of those losses and the bankruptcy filings you went through,

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Speaker 1: how much damage did they do?

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Speaker 3: I'd say I think the most severe run was a

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Speaker 3: Voyage or digitally, they lost thirty six percent of their

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Speaker 3: assets over the course of a couple of weeks, and

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Speaker 3: that was several hundred million dollars overall.

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Speaker 2: It was in the billions. Of course, it depends on

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Speaker 2: how you value it.

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Speaker 3: Because these firms, by the time they actually went bankrupt,

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Speaker 3: the crypto acids they were holding were worth less, it

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Speaker 3: would be almost double in ten or twenty billion if

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Speaker 3: we valued it at the peak of their crypto asset holdings.

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Speaker 4: You see an industry here that's kind of in search

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Speaker 4: for new players when it comes to trading and exchanges

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Speaker 4: and even lending. Here, when you kind of look at

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Speaker 4: the research that you've done across the firms that have

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Speaker 4: gone bankrupt, what are the things that you worry about

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Speaker 4: the most in terms of behaviors that might repeat itself.

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Speaker 3: Yeah, I mean, I think this is an industry where

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Speaker 3: we've seen instances of trying to avoid regulation. In the

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Speaker 3: case of these five firms that we studied last year,

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Speaker 3: the most important regulation at issue is securities laws. And

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Speaker 3: you know, if they were offering investment products that were

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Speaker 3: promising high returns and they weren't registering them as securities,

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Speaker 3: and so that this is the exact sort of lapse

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Speaker 3: in investor protection that securities laws are concerned about.

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Speaker 2: I'd also say more.

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Speaker 3: Generally, you know, I don't need to tell you there

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Speaker 3: have been acts of fraud. In addition to the well

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Speaker 3: known cases involved in the FTX, there's also, for example,

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Speaker 3: Celsius and the fraud accusations that the State of New

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Speaker 3: York has brought against its leaders. And that's the sort

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Speaker 3: of thing that can lead to run behavior because you know,

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Speaker 3: people have studied runs.

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Speaker 2: Over financial history.

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Speaker 3: They find that when investors have trust in their financial institutions,

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Speaker 3: they're more likely to stick around during our crisis. And

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Speaker 3: when you have an ecosystem like the cryptocid ecosystem in

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Speaker 3: which there have been a number of frauds and unexpected losses,

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Speaker 3: I think investors might be particularly skittish and prone to

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Speaker 3: running on institutions in a crisis.

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Speaker 1: You know, I'm looking at your study, Jonathan, I see

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Speaker 1: that Celsius marketed the platform with catchphrases like banks are

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Speaker 1: not your friends and unbank yourself. Voyager Digital urged customers.

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Speaker 2: To beat your bank.

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Speaker 1: So yeah, I mean this is really a pitch that

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Speaker 1: these firms were making. Chanaleg Well, you know.

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Speaker 4: What's interesting here too, Matt. I'm kind of curious to

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Speaker 4: hear one more thing from Jonathan here, which is that

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Speaker 4: there are a lot of regulators out there who believe

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Speaker 4: that crypto is kind of a fringe industry and a

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Speaker 4: risk that's on the horizon. But we have a Chicago

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Speaker 4: fed historian here telling us that this is a classical

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Speaker 4: financial crisis in some ways. Do you think regulators are

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Speaker 4: realizing the ripple effects here.

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Speaker 3: Jonathan, I think they're super focused on potential rep per

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Speaker 3: effects and trying to assess them. I mean, I think

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Speaker 3: for the most part, the cryptod ecosystem is not too

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Speaker 3: interconnected with the rest of.

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Speaker 2: The traditional financial system.

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Speaker 3: But we did see some at the end of last year,

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Speaker 3: especially with Silvergate and Signature, two of the most important

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Speaker 3: banks in terms of serving crypto aid customers. And you know,

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Speaker 3: the collapse of FTX and other volatility in the crypto

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Speaker 3: asid ecosystem last year, like they contributed to their defaults,

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Speaker 3: and you know, and we're one factor in the in

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Speaker 3: the banking problems we saw, especially at their height end March.

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Speaker 3: So that's the sort of unexpected spillover in traditional financial

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Speaker 3: sector that I think financial regulators are very focused on.

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Speaker 2: Jonathan.

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Speaker 1: I wonder when looking at a lot of these firms,

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Speaker 1: they had differentiated units in for example, FTX had a

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Speaker 1: US unit that wasn't involved in the collapse and failure

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Speaker 1: of the larger international unit that was based offshore. You know,

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Speaker 1: a number of these businesses are breaking themselves down regionally.

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Speaker 1: And of course the concern is that US investors get

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Speaker 1: caught up in it by using VPNs or some other

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Speaker 1: means investing in international assets.

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Speaker 2: But we don't know. Were you able to.

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Speaker 1: Decipher in any way how much these bankruptcies impacted US

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Speaker 1: based investors as opposed to international.

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Speaker 3: Well, for the most part, the bankruptcy courts kept the

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Speaker 3: user names confidential, except for Celsius, where you can actually

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Speaker 3: see the names of every one of their users. But yeah,

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Speaker 3: so you can see you can see a number of

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Speaker 3: international users with names in other alphabets, for example. But

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Speaker 3: that's a tough question, and I think one of the

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Speaker 3: regulars probably still sorting through the extent to which US

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Speaker 3: customers are accessing overseas platforms. But they had a lot

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Speaker 3: of US customers in these platforms.

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Speaker 4: Jonathan Rose, thank you for your research and your time.

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Speaker 4: That is Jonathan Ro's Chicago fed Economic Advisor.