Cryptocurrency Contagion
Cryptocurrency Feature Stories Middle East & Africa

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.

It argues that the firm’s collapse jeopardised the value, market participation and trust of the entire cryptocurrency ecosystem, given that it caused more than one million people and businesses to lose $8billion in assets.

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.

A second key takeaway is that the contagion attributed to centralised finance (CeFi) institutions in cryptocurrency also exists in decentralised finance (DeFi) systems.

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

The first example illustrates system-based interdependencies. On 11 October 2022, Mango Markets suffered a 40-minute exploit in which attackers initiated a ‘pump-and-dump’ sequence to exploit failures in the surveillance ability of three different exchanges.

This exploit left a trail of bad debts and substantial legal, financial, and reputational risks for all the exchanges involved.

The analysis of the Three Arrows Capital saga presents an example of institution-based interdependencies and the risks associated with it.

As one of the first cryptocurrency firms to go bankrupt in 2022, which it filed for in July, the hedge fund’s collapse enabled substantial risk transmission to other participants in the broader cryptocurrency market networks; four months prior to that of FTX.

Policy recommendations

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.


  • Tyler is a fintech journalist with specific interests in online banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

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