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Chicago Fed Letter No. 479: Crypto Runs and the FTX Collapse - Federal Reserve Bank of Chicago
webchicagofed.org·chicagofed.org/publications/chicago-fed-letter/2023/479
This Federal Reserve analysis of the 2022 crypto collapses is tangentially relevant to AI safety primarily as a case study in systemic risk, unregulated financial intermediaries, and governance failures in emerging technology sectors.
Metadata
Importance: 18/100organizational reportanalysis
Summary
This Chicago Fed Letter analyzes the collapse of multiple crypto-asset platforms in 2022, framing them as classic bank-run dynamics in a novel setting. The authors examine how platforms like FTX, Voyager Digital, and others were structurally vulnerable due to offering liquid withdrawals while holding illiquid assets, with FTX experiencing 25% customer withdrawals in a single day.
Key Points
- •Crypto platforms were subject to classic run risk: they promised on-demand withdrawals while investing customer funds in illiquid, high-risk assets to fund high-yield returns.
- •FTX customers withdrew approximately 25% of funds in a single day during its collapse, based on bankruptcy filing data analysis.
- •The 2022 crypto crisis followed a boom period where Bitcoin rose ~10x from Jan 2020 to Nov 2021, attracting millions of retail and institutional customers.
- •Multiple platforms including FTX, Voyager Digital, and others entered bankruptcy, collectively representing a systemic crisis in the crypto sector.
- •The episodes raise urgent policy concerns about regulation of crypto-asset platforms that functionally operate like banks without equivalent oversight.
Cited by 1 page
| Page | Type | Quality |
|---|---|---|
| FTX Red Flags: Pre-Collapse Warning Signs That Were Overlooked | -- | 53.0 |
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Chicago Fed Letter, No. 479, May 2023[Crossref](https://doi.org/10.21033/cfl-2023-479)
A Retrospective on the Crypto Runs of 2022
By
[Radhika Patel](https://www.chicagofed.org/people/p/patel-radhika), [Jonathan Rose](https://www.chicagofed.org/people/r/rose-jonathan)
[Financial Economics](https://www.chicagofed.org/research/content-areas/jel-topics/financial-economics)
In this article, we describe the spectacular collapse of several crypto-asset platforms in 2022 following investment losses and widespread customer withdrawals. These platforms offered and marketed to customers a number of products and services related to crypto-assets, including high-yield investments, trading, and custody services. The platforms were subject to run risk: They allowed customers to withdraw funds on demand while using those funds to make illiquid and risky investments, in part to generate the high rates of returns promised to customers on investment products. In one of the most severe episodes, customers withdrew a quarter of their investments from the platform FTX in just one day, according to our analysis of data from its bankruptcy filing. These episodes together formed a classic financial crisis in a novel setting that has raised urgent policy concerns.
## Background
Interest in crypto-assets grew enormously over 2020 and 2021. As funding flowed into crypto-asset markets, prices rose rapidly and peaked around November 2021. For example, the price of Bitcoin rose almost ten times from January 2020 to November 2021.
Amid this boom, customers flocked to crypto-asset platforms. These platforms attracted users by offering the ability to easily trade and custody crypto-assets and invest in high-yield investment products. Figure 1 details a selection of platforms—focusing on those that have entered bankruptcy and shut down since the start of 2022. These platforms had both retai
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