The crypto infrastructure cracks

IT HAS BEEN a vicious year for financial markets, and more punishing still for crypto assets. More than half the market capitalisation of cryptocurrencies has been wiped out since November. On May 12th bitcoin traded at around $29,000, just 40% of its all-time high in November; ether has slumped by a similar amount. The share price of the leading crypto-industry stock, Coinbase, an exchange, is half what it was a week ago, falling 26% in a single day after it reported earnings and disclosed that users’ deposits on its platform were not necessarily protected in the event that the firm went bust. The sell-off comes at the same time as tech stocks, high-yield bonds and other risky assets have swooned as the Federal Reserve has begun raising interest rates.Much of the technology (and the jargon) of the crypto-sphere is bewildering, still, to most people in traditional finance. Yet the dynamics of recent days bear the hallmarks of spectacular financial collapses of old. Take what has happened to stablecoins, a type of cryptocurrency that is pegged to another currency, sometimes a conventional one like the dollar. These are part of the plumbing of the crypto system: they act as a bridge between conventional banks, where people use dollars, and the “on-blockchain” world, where people use crypto. It is stablecoins’ interaction with traditional finance that has led regulators to fret about the impact they could have on financial stability.