As the crypto industry becomes more closely linked to traditional finance, the next crypto collapse could cause broader financial instability, according to a new report from the Organisation for Economic Co-operation and Development.
Researchers behind the report assert that the failures of these firms exposed the interconnectivity between businesses in crypto. OECD experts write that “this increases risks of wide-scale disruption and contagion within the crypto-asset markets if any of these dominant players faces difficulties in the future.”
Decentralized finance is also more connected to exchanges than some advocates say, the report argues, calling centralized trading firms, "in many ways the lifeline of DeFi” as they provide a source of funds and collateral for DeFi protocols.
For example, centralized exchanges are “in many ways the lifeline of DeFi.” The report centers around the falls of crypto lending firm Celsius, hedge fund Three Arrows Capital, trading firm FTX and stablecoin issuer TerraUSD, incidents that left scars on the crypto industry this year. By mid-June, the crypto market value lost $ 1.7 trillion compared to its peak, according to OECD statistics.
The OECD is made up of representatives from 38 countries streamlines global economic standards. Its framework on reporting on crypto taxation influenced European Union legislation this month.
The new report, which takes lessons from the longer “crypto winter” that started before FTX's implosion, comes the day after FTX founder Sam Bankman-Fried was criminally indicted, the latest turn in a saga that has rocked the entire industry.
Traditional finance has not been significantly affected by the turbulence in crypto markets since they are too small in comparison and not deeply linked — for now.
“Should conditions change, a future instance of similar turmoil in a larger crypto-asset market could have implications for financial stability,” the report said. The OECD’s claims an “urgent need for policy action,” especially to protect retail investors due to the “disproportionate impact” on them. That call echoes similar recommendations from other international institutions.
The OECD calls for international collaboration on crypto policy to avoid regulatory arbitrage opportunities and avoid fragmentation in regulation around the world.