Consolidation Conjurs Contagion for Global Cryptocurrency Market

Contagion in the cryptocurrency ecosystem is transmitted not merely through large actors, but through ‘systemically important actors’.

A new study has attributed the acute impacts of the 2022 – 2023 cryptocurrency contagion not to the collapse of the larger, more visible actors, but to the interdependencies in the ecosystem.

The Bangalore-based think tank, Policy 4.0 and its newly-released study, ‘Interdependencies in Crypto Ecosystems‘, explores the catalysts that shook the cryptocurrency ecosystem to its core last year through analysis of both on and off-chain data.

In this context, contagion in the world of finance refers to when a single financial crisis spreads like a virus throughout the entire ecosystem, triggering significant market drawbacks as a result. A good example of this would be the collapse of the doomed cryptocurrency exchange FTX in November 2022; which the study cites in its research.

However, according to the study, it wasn’t players like FTX who lit the spark, but rather the complex interrelationships between systems and significant participants in the market behind the exchange that are to blame for the blaze.

Silent killers

The study puts forward that the cryptocurrency ecosystem is far less fragmented than first thought, and in the context of financial contagion, those bound for collapse are ultimately going to pull down others tied to them.

As put forward by the think tank, crypto markets have developed into networks of complex interrelationships between systems and significant market participants; very much akin to traditional financial systems.

While a lot of debate may focus on large visible actors, the study defines the system’s interdependent players as having a much greater role in its fragility.

The report proposes a two-part classification of both institution and system-based interdependencies and illustrates the same with detailed case studies:

The report concludes with recommendations to policymakers to focus on interdependencies and internal risk control mechanisms of crypto firms as a key focus of regulations. The report also throws new light on provisions being discussed in recent FSB, G20 and IMF recommendations on cryptocurrency assets.