Showing posts from June, 2021

Crypto's Weimar

  A cryptocurrency has just re-enacted the Weimar hyperinflation. Yesterday, the price of the cryptocurrency TITAN crashed to zero, and its related stablecoin IRON fell off its USD peg, trading as low as 69 cents to the dollar. It was a sudden and dramatic collapse that left investors shocked and bewildered. Equally shocked and confused, the coins' issuer launched an immediate investigation:  Iron Finance issued its post mortem a few hours later. This is the key paragraph: Later, at around 3pm UTC, a few big holders started selling again. This time, after they started, a lot of users panicked and started to redeem IRON and sell their TITAN. Because of how the 10mins TWAP oracle works, TITAN spot price drops even further in comparison to the TWAP redemption price. This caused a negative feedback loop, as more TITAN was created (as a result of IRON redemptions) and the price kept going down. A classic definition of an irrational and panicked event also known as a bank run. At the ti

Bank capital and cryptocurrencies

The BIS's draft proposals for capital regulation of stablecoins and cryptocurrencies have just been released. The headline proposal was a risk weighting of 1250% for what the BIS called "Group 2 cryptoassets", which includes all cryptocurrencies, all algorithmic stablecoins, and reserved stablecoins  that don't meet the capital, liquidity and disclosure requirements for "Group 1 cryptoassets" specified in the same document. Bitcoin and Ethereum, the two major cryptocurrencies, would fall into Group 2, along with most (possibly all) existing stablecoins.  The proposals were widely misunderstood in the crypto community. As ever, much of the misunderstanding was about the nature of bank capital.  Many people confuse bank capital with reserves. Reserves are cash deposits at the central bank and vaulted currency. They enable customers to withdraw cash and make payments out of their deposit accounts. Without them, banks would have to go to the market for funding