“Tulipmania meets the real economy at the speed of WhatsApp”

With the world’s superstars joining the global elites in Davos – and gamblers sweeping into the market crash suffering from sleepless nights – it’s time for regulators to reflect on the real impact of the next crypto boom and bust.

Fintech and crypto applications have already rapidly expanded into digital cash, loans, and complex products that can appear as simple as a credit card in the form of an email. This has created financial channels that go far beyond one-way betting on Bitcoin or Bored Apes: Decentralized Finance (DeFi) platforms offer 8%-10% crypto returns to investors; Then some, in turn, fund start-ups all over the world without touching the banks. Tulipmania meets the real economy at the speed of WhatsApp.

In these times of market stress, self-proclaimed unsustainable rewards have given way to a chaotic slate of losses – highlighting the enormous challenge facing policymakers, some of whom admit they have dropped the ball on cryptocurrencies.

Crypto funds are currently being snatched from lending platforms, even those backed by real assets. A project offering returns of 8% on token debt issued by French payday lender Bling has been hit with “massive” payback strikes beyond available cash and a credit line from venture capital backers. For one investor I spoke to, this means he will likely have to wait months to get his money back. His main motivation for investing in the first place was free token rewards, which have since evaporated.

Meanwhile, at the other end of the chain, end-consumer lending has also come to a standstill. Bling suspended cash advance service in April, as regulators cracked down on the sector. One consumer advocacy group estimated the cost of a one-month Bling instant advance to equate to an annual interest rate of 128% when fees are included.

A small venture backed by collateral such a rush to sell assets is clearly nothing on the $60 billion scale of the Terra meltdown, which saw desperate Koreans knock through founder Do Kwon’s door. But it shows why regulators are concerned about future risks to the financial system.

These free bonuses and high returns are reeling in people who may be least able to afford them. ECB data shows that cryptocurrency ownership is a U-shaped relationship, with higher-income and lower-income households more likely to own cryptocurrency than those in the middle.

Ties to the financial system are growing as investment funds and banks seek to tap into the disruptive potential of cryptocurrencies — Societe Generale SA has been manipulating DeFi loans while others are launching stablecoins. “There is a very widespread feeling within the investor community that one has to dip their toes,” says economist Eswar Prasad, author of The Future of Money.

Today’s cryptocurrency markets are modest in size — the current total value booked in DeFi is about $100 billion, or about one-sixth of total venture capital investment last year — but what could dozens of crypto lending operations look like in the future if this sector continues to grow. ? The race to sell assets to meet cryptocurrency redemptions could have huge spillover effects, especially if they are managed using algorithms via smart contracts. The parallels with the sub-prime market that led to the global financial meltdown in 2008 are frequently drawn.

“Although the risks are currently small, they could rise significantly if platforms start providing services to the real economy, rather than remaining confined to the crypto world,” the European Central Bank said last week, noting that crypto credit on DeFi platforms has grown. by a factor of 14 in 2021.

The founders and financiers behind DeFi platforms like Centrifuge or Goldfinch say that serving real-world businesses is still a good news story for cryptocurrency. Managing projects with algorithms and cutting back shuffle means unleashing efficiency gains and accessing capital, they argue, and building useful infrastructure the way previous market bubbles built railroads and the Internet.

Probably. But these are also banking-like activities that you can do with more supervision like banking. They often include complex financial structures that tie together several Delaware LLCs with little legal recourse and high counterparty risk. It is part of a widespread proliferation of fintech lending that has yet to be properly tested in the downturn. Instead of a high-speed train, this can look more like a “squared banking shadow,” in the words of fintech investor Peter Loughley.

Expect some of this activity to be pulled into the spotlight as a result of institutional and regulatory focus: Perhaps the next step is for the likes of Bling to behave like regular banks and DeFi lending platforms will include more big-name central funds doing their bidding. But given the way animal spirits tend to return, regulators will know risk management will get tougher from here.

(Except for the headline, this story has not been edited by the NDTV crew and is published from a syndicated feed.)