Bank Runs During Crypto Winter

42 Pages Posted: 15 May 2023 Last revised: 18 Oct 2024

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Jeffery Y. Zhang

University of Michigan Law School

Date Written: May 12, 2023

Abstract

"Crypto Winter" refers to a systemic event that occurred in the cryptocurrency ecosystem—what we call "crypto space"—in 2022. Crypto space was wracked by plummeting crypto prices, the troubles of a large crypto hedge fund, and runs on many crypto lending platforms. Several large crypto firms went bankrupt. Collectively, everyday people lost billions of dollars. And crypto investors are still feeling the aftershocks.

We begin with two observations: First, despite mass marketing campaigns to the contrary, crypto lending platforms recreated and replicated traditional banking. They were vulnerable to runs because, like all banks, they borrowed short and lent long. This is the essence of banking, so we label these lending platforms "crypto banks." Second, crypto space was largely circular. Once crypto banks obtained deposits and investments, these firms borrowed, lent, and traded mostly between themselves. As a result, Crypto Winter did not cause the kind of financial turmoil that we witnessed in either 2008 or 2020, nor did it cause an economic recession.

We then sound a warning for regulators. The next generation of crypto firms are linking up with the financial sector, which means their failures will spill over into the real economy. To contain the inevitable growth of systemic risk, regulators should use banking laws to address a banking problem.

Keywords: crypto winter, crypto banks, bank runs

JEL Classification: E00, E4

Suggested Citation

Gorton, Gary B. and Zhang, Jeffery Y., Bank Runs During Crypto Winter (May 12, 2023). 14 Harvard Business Law Review 297 (2024), U of Michigan Law & Econ Research Paper, Available at SSRN: https://ssrn.com/abstract=4447703 or http://dx.doi.org/10.2139/ssrn.4447703

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Jeffery Y. Zhang

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,422
Abstract Views
6,397
Rank
28,622
PlumX Metrics