Crypto contagion? What Terra’s ‘Lehman Brothers’ moment means for markets

It’s been a dark start to the year for the crypto market.

Taken as a whole, cryptocurrencies’ market cap is down roughly 45% year-to-date, and in just a week’s time, the world’s leading digital assets, Bitcoin and Ether, have plummeted 23% and 31%, respectively.

Even worse, since November 2021’s highs, cryptocurrencies have given back around $1.6 trillion in value, and some of the most respected names in the industry are arguing this week’s blow-up of the algorithmic stable coin TerraUSD (UST) is a “Lehman Bros event.”

But unlike the events leading to the subprime mortgage crisis of 2008, the financial community is divided on whether a crypto blowup could lead to systemic risk for financial markets.

"It will probably be a ‘Lehman Bros’ event for the Terra ecosystem,” the billionaire founder of FTX, Sam Bankman-Fried, told Fortune on Thursday. “But the contagion to the rest of the crypto industry is going to be more limited."

While Bankman-Fried isn’t worried about the fallout from UST’s collapse, risks from a serious downturn in crypto are definitely something U.S. Treasury Secretary Janet Yellen has on her mind.

In front of the Senate Banking Committee on Tuesday, Yellen argued that “digital assets may present risks to the financial system and increased and coordinated regulatory attention is necessary,” specifically citing turmoil in the crypto markets and the collapse of the TerraUSD stablecoin.

On the whole, most experts agree that, as of now, the risk of a domino effect trampling through financial markets akin to what was seen in the Great Financial Crisis is limited.

“The realm of crypto has been dominated by a handful of larger investors and small retail players. The odds that this meltdown becomes a source of contagion to the financial system is thus remote,” Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, told Fortune.

But that doesn’t mean another type of contagion risk isn’t possible.

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