Raphael Stevens

It was a curious omission. In February, when the Federal Reserve published the winter edition of its semi-annual report to Congress, it dropped a normal section outlining the appropriate level of interest rates as determined by “monetary-policy rules”. Its inclusion might have been awkward, because it would have suggested that rates should be as high as 9%, when the Fed still had them near to 0%. In subsequent hearings at least three members of Congress pressed Jerome Powell, the Fed’s chairman, to explain its absence. Mr Powell promised that the section would be back in its next report. And so it was when the summer edition was published on June 17th—though only after the Fed had started to catch up to the rules’ prescriptions by rapidly raising rates.As controversies go, the disappearance of a three-page section in a lengthy policy report was rather minor. It garnered scant media coverage. Nevertheless, it was important. It shone light on a decades-old question that is being asked with more insistence amid soaring inflation: should central banks limit their discretion and set interest rates according to black-and-white rules?The search for rules to guide and constrain central banks has a long pedigree. It dates back to the 1930s when Henry Simons, an American economist, argued that authorities should aim to maintain “the constancy” of a predetermined price index—a novel idea in his era. In the 1960s Milton Friedman called for central banks to increase the money supply by a set amount every year. That monetarist rule was influential until the 1980s, when the relationship between money supply and gdp broke down.Any discussion of rules today conjures up a seminal paper written in 1993 by John Taylor, an economist at Stanford University. In it he presented a straightforward equation which came to be known as the “Taylor rule”. The only variables were the pace of inflation and the deviation of gdp growth from its trend path. Plugging these in produced a recommended policy-rate path which, over the late 1980s and early 1990s, was almost identical to the actual federal-funds rate, the overnight lending rate targeted by the Fed. So it seemed to have great explanatory power. Mr Taylor argued that his rule might help to steer central banks on the right path for rates in the future.However, just as the Taylor rule started to get attention from economists and investors alike, its explanatory power grew weaker. In the late 1990s the recommended Taylor rate was consistently lower than the fed-funds rate. That sparked a cottage industry of academic research into alternative rules, mostly grounded by Mr Taylor’s original insights. Some put more weight on the gdp gap. Others added inertia, since central banks take time to adjust rates. Another group shifted from current inflation to forecasts, trying to account for the lag between policy actions and economic outcomes. In its reports the Fed usually mentions five separate rules. The appeal of rules lies in their cold neutrality: they are swayed only by numbers, not by fallible judgment about the economy. Central bankers love saying that their policy decisions are dependent on data. In practice they sometimes struggle to listen to the data when their message is unpalatable, as it has been with inflation for the past year. Central bankers found numerous reasons, from the supposedly transitory nature of inflation to the limited recovery in the labour market, to delay raising rates. But throughout that time, the suite of rules cited by the Fed was unambiguous in its verdict: tightening was needed.The rules are, however, not perfectly neutral. Someone first has to construct them, deciding which elements to include and what weights to ascribe to them. Nor are they as tidy as implied by the convention of calling them “simple monetary-policy rules”. They are simple in the sense that they contain relatively few inputs. But just as a bunch of simple threads can make for one messy knot, so a proliferation of simple rules has made for a baffling array of possibilities. For example, the Cleveland Fed publishes a quarterly report based on a set of seven rules. Its most recent report indicated that interest rates should be anywhere between 0.6% (per a rule focused on inflation forecasts) and 8.7% (per the original Taylor rule)—an uncomfortably wide range.Moreover, each rule is built on top of a foundation of assumptions. These typically include estimates of the long-term unemployment rate and of the natural interest rate (the theoretical rate that supports maximum output for an economy without stoking inflation). Modellers must also settle on which of a range of inflation gauges to use. Slight changes in any of these inputs—common during periods of economic flux—can produce big swings in the rates prescribed by the rules. For example, an adjusted version of the Taylor rule, based on core inflation, would have recommended an interest-rate increase of a whopping 22 percentage points over the past two years (starting from negative 15%). Slavishly following such guidance would make for extreme volatility. Average eleganceOne possible solution is to combine multiple rules into a single result. The Cleveland Fed does just this, constructing a basic median out of the seven rules it tracks. Using this as a reference point, Mr Powell and his colleagues ought to have started raising rates gingerly in the first quarter of 2021 and should have brought them to roughly 4% today, more than twice as high as they actually are. That is much more sensible as a recommendation than the conclusion yielded by any single policy rule.Such a median could never substitute for analysis of a range of data by central banks. But there is a big difference between taking rules seriously and treating them as holy writ. After all the inflation missteps of the past year, a healthy sample of rules deserves a closer look in policy debates. And they certainly deserve more prominence than they currently get as a short section in monetary reports that the Fed can choose to omit when inconvenient. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter.Read more from Free Exchange, our column on economics:Are central banks in emerging markets now less of a slave to the Fed? (Jul 9th) The case for strong and silent central banks (Jun 30th)People’s inflation expectations are rising—and will be hard to bring down (Jun 19th) More

Market commentators and investors often exaggerate the uniqueness of their times. History counts no fewer than four “Black Mondays”—echoing the “Black Thursday” that sparked the 1929 Wall Street crash, which heralded the Great Depression—even though the 1987 and 2015 editions rapidly proved unremarkable. Many other days once doused in dark paint have been forgotten. The 25-year period to 2007 looks so boring, in hindsight, that it is dubbed the “Great Moderation”. The ensuing financial crisis did rock markets, but the pattern of hyped but transitory shocks soon resumed—remember the taper tantrum of 2013? This year there have been plenty of stomach-churning gyrations. Since January the nasdaq, a tech-heavy stock index, is down by almost 30%. The shocks keep on coming. Just as investors started to worry about stubborn inflation, Russia invaded Ukraine, turbocharging commodity prices and piling more pressure on central banks to crank up interest rates. China is strangling its economy with its zero-covid policy.But just how unusual is the turmoil? In order to quantify its uniqueness, Buttonwood has examined three measures of market-related uncertainty: expected asset-price volatility, divergence in economic forecasts and the unpredictability of economic policy as chronicled in the media. The tests suggest we really are living in unusual times. Start with swings in asset prices. In the past month America’s s&p 500 stock index has been three times more volatile than it was before the pandemic. And investors are still jittery. The volatility index (vix)—which captures investors’ appetite for insuring themselves against future stock-price moves—has hovered at around 25 points since 2020, nearly eight points above its 2010s average. That is not unprecedented, however. Since the 1990s a range of crises, from the Gulf war to the dotcom crash, have kept the vix near 25 points for months.The bond-market hysteria is more unusual. The Merrill Lynch Options Volatility Estimate (move) is a gauge of fear among bond investors. It is at levels last seen in March 2020, when the spread of covid-19 caused market panic, although it is still lower than during the 2007-09 financial crisis. The elevated move reflects the clumsy pivot in central-bank policy. On May 4th Jerome Powell, the chairman of the Federal Reserve, signalled it was not even considering raising rates by 0.75 percentage points at its next meeting—before doing just that six weeks later.Central bankers have become hard to read for a reason: the macroeconomic oracles on which they partly rely, our second gauge, are exceptionally dispersed. A measure of disagreement among professional forecasters of economic growth surveyed by the Philadelphia Fed is nearly triple its typical 2010s level; it has been above two percentage points for nine consecutive quarters, which last occurred between 1979 and 1981, when inflation was in double digits. Our third measure of uncertainty, that arising from the inscrutable outlook for economic policy, indicates lasting change the most clearly. An index built by Scott Baker of the Kellogg School of Management and colleagues tracks the frequency of articles that include worrying bundles of words—such as “regulatory”, “economic” and “uncertainty”—in global publications. It suggests that economic-policy unpredictability has been rising steadily since the financial crisis and is now far higher than in the late 1990s, when the index began. That our indicators are flashing red at the same time suggests an enduring step-up in uncertainty from which it may be hard to climb down. Furthermore, the different types of uncertainty reinforce each other. Political polarisation, which tends to make economic policy erratic, is fuelled by high inflation. All this means the economy is harder to forecast, making life harder for central banks, in turn spooking investors. The fragmentation of global trade doesn’t help. The unwinding of supply chains encourages stockpiling during booms and fire-sales during busts, amplifying economic swings.Persistent uncertainty means a higher cost of capital and less affordable insurance against shocks. All of which tends to dampen business investment, weighing on gdp growth and equity returns. There have been many dark days for the nasdaq in 2022: the index has already recorded 32 daily falls of more than 2% since January. This time their entry on the calendar of doom looks deserved. For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter.Read more from Buttonwood, our columnist on financial markets:Crypto’s last man standing (Jul 9th)What past market crashes have looked like (Jun 30th)How attractively are shares now priced? (Jun 25th) More

Financial markets are supposed to follow a strict division of labour. The central bank sets the risk-free rate to stimulate or cool the overall economy, but it is “market-neutral”: it does not favour any asset over another. Private investors choose who to lend to and at what risk premium. Combine the two judgments, and the economy should have a set of interest rates that reflects economic conditions. The European Central Bank (ecb), however, thinks markets are not doing their job—or at least not the way it wants. It is preparing to intervene in two novel ways: by limiting what it deems an acceptable difference (or spread) in rates between sovereign borrowers; and by greening its bond purchases and banking rules. In doing so it will abandon market neutrality and discriminate between assets.Start with sovereign spreads. On July 21st the ecb is expected to unveil a new tool meant to prevent borrowing costs among euro-zone governments from diverging too much. The aim is to ensure that monetary-policy decisions work similarly across the bloc. If rising rates, say, led to ballooning spreads, with the extra costs transmitted to private borrowers, some regions might feel a bigger squeeze than others. The currency union has a history of such divergence. During the euro crisis, between 2011 and 2015, a bigger spread between sovereigns also meant tighter financial conditions for private firms and households. Yet some argue that the ecb’s mooted tool is not needed today. Europe has cleaned up its banks; the ecb has pledged to do whatever it takes to save the euro. In the private sector fragmentation is less of an issue: lending rates to firms in Italy are at the level they were before the euro crisis, relative to Germany’s, despite widening sovereign spreads. Moreover, the policy looks tricky to implement. The ecb will need to define what counts as an “excessive” spread. That is hard, because economists do not know what the true, justified interest rate is for any given bond. The tool could encourage vulnerable countries to borrow at will, knowing the ecb is capping their spreads. So strings may have to be attached. And if it is deemed akin to monetary financing, which is barred under the Maastricht treaty, it may stumble in the courts.Still, the ecb is likely to forge ahead. There is an emerging consensus that, in a diverse monetary union, managing sovereign spreads is part of monetary policy. Increasingly the ecb also sees as its duty to curb the financial risks of climate change—its second break away from market neutrality. On July 4th the bank said it would “tilt” its corporate-bond buying towards issuers “with better climate performance”. The central bank is also making it harder to pledge carbon-intensive assets as collateral for loans from the central bank.The ecb‘s neutrality was always a myth, says Pierre Monnin, an economist at the Council on Economic Policies, a think-tank in Zurich. Market-based estimates of risk are inevitably flawed when it comes to climate change, because no comprehensive system of carbon pricing exists. By failing to correct for unpriced “externalities”—harms imposed by borrowers on third parties—the ecb’s nominally neutral stance in fact reinforced such inefficiencies. Fossil-fuel firms also rely more on bond financing than renewables. But although these arguments are economically sound, it is not the traditional role of central banks to price externalities when the government has failed to act.And are the ecb’s own risk assessments up to the task? One yardstick is the adequacy of its first climate-stress test, whose results were published on July 8th. These suggest that 41 of Europe’s biggest banks could together suffer about €70bn in credit and market losses over the next three years in the event of more frequent natural disasters and a disorderly energy transition. That is only around 4% of these banks’ aggregate capital, and far less than the €400bn of damage the ecb reckons might hit them in an economic downturn.Yet the ecb itself admits the stress test is only a “learning exercise”, rather than an attempt to find out if the banks have a big-enough buffer to withstand climate chaos. Most banks do not have enough data to properly estimate climate losses; many lack the tools for incorporating climate risks into lending decisions. The ecb‘s first stab at totting up the potential costs of a messy transition is most probably a gross underestimate. By dropping market neutrality, the central bank is taking a more political role. Whether its visible hand ends up bending markets in the right direction is another question. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter. More

A little less than eight years is not an especially long tenure for heads of government in much of the world. In Japan, it is a veritable aeon. And two years after the resignation of Abe Shinzo, a former prime minister who was assassinated on July 8th, the reforms he pushed in office look set to shape Japan’s economy for years to come.The current prime minister, Kishida Fumio, secured a big majority of seats in the upper house of Japan’s legislature in the election on July 10th. His greater focus on equality and redistribution, which he calls “New Capitalism”, was initially cast as an alternative to Mr Abe’s vision. In reality, it will be built on the foundations his predecessor laid out. The programme which began after Mr Abe’s 2012 thumping election victory—dubbed Abenomics—had three so-called “arrows” to dislodge Japan from its economic stagnation: flexible fiscal policy, monetary expansion and structural reforms. Clear positives stand out from Mr Abe’s record, most notably the financial accounts of Japan Inc. Reforms to corporate governance encouraged more shareholder-friendly activity and prodded firms to reduce moribund networks of cross-shareholdings. Those changes, paired with a slump in the yen, boosted corporate earnings to record levels (see chart). An environment friendlier to investors also helped to raise anaemic levels of inward foreign direct investment. In 2020, direct investment into Japan was worth 1.2% of gdp, the highest on record. There have been stark improvements in the labour market, too. Japan’s female employment rates, previously low by the standards of rich economies, climbed rapidly under Mr Abe. At 72% among working-age women, the employment rate is now more than ten percentage points above the levels Mr Abe inherited, and six percentage points above the American equivalent. Kathy Matusi, the economist who championed increasing female participation as a way to unlock the productive potential of the Japanese economy, credits Abe-era reforms, such as mandatory disclosure on gender diversity and more generous salary replacements for new parents.Mr Kishida’s aides now talk less of ditching Abenomics and more of building its legacy. When his New Capitalism Council revealed its “grand design” document in May, it concluded that the strategy would adhere to the three-arrow framework. The strategy focuses, rightly, on the need to get firms to deploy their excess cash through wage increases or capital investments. Stagnant wages have been Abenomics’s biggest shortcoming. At around 266,000 yen ($1,940) per month in May, Japan’s average wage has barely budged in a decade, and has actually fallen in real terms. Most of the recent rise in female employment reflects growth in part-time jobs that are usually poorly paid. This is where Mr Kishida could have the most to offer. Regrettably, his approach to the issue so far differs little from Mr Abe’s: tax incentives and browbeating, with a bit of a boost for public-sector workers.Fiscal policy was a troubled area for Mr Abe, and is likely to remain one for Mr Kishida. Two long-planned but ill-fated increases in Japan’s sales tax, in 2014 and 2019, made fiscal policy a drag on the recovery rather than a boost. Spending under Mr Abe was not as flexible as the first arrow’s label would have suggested. After leaving office, Mr Abe did convince the party to soften its pledge to balance the primary budget (excluding debt-servicing costs) by 2025. But Mr Kishida is said to be more concerned about fiscal sustainability. His closest advisers have backgrounds in Japan’s typically hawkish finance ministry. Mr Abe’s support for a more stimulative monetary policy has also lasted beyond his tenure, with mixed effects. Enormous purchases of bonds, and a subsequent policy to directly fix the yields of government bonds, may have prevented Japan from falling back into deflation, but failed to stimulate inflation or nominal-income growth as desired. As inflation rises globally, the Bank of Japan may find it harder to keep policy easy. But Mr Kishida will likely pick a continuity candidate when Kuroda Haruhiko, Mr Abe’s central-bank governor, leaves office next April.With Mr Abe gone, might Mr Kishida feel liberated to diverge further from his predecessor? Different global conditions could fuel such a change. Concern about fiscal discipline has more truck in a world of rising interest rates. But the differences between Mr Abe’s and Mr Kishida’s approach now look more likely to be a matter of degree rather than substance. Mr Kishida’s focus on wages, in particular, could augment the successes of Abenomics if properly pursued. Mr Abe’s arrows, in short, will remain essential weapons. ■For exclusive insight and reading recommendations from our correspondents in America, sign up to Checks and Balance, our weekly newsletter. More

A little less than eight years is not an especially long tenure for heads of government in much of the world. In Japan, it is a veritable aeon. And two years after the resignation of Abe Shinzo, a former prime minister who was assassinated on July 8th, the reforms he pushed in office look set to shape Japan’s economy for years to come.The current prime minister, Kishida Fumio, secured a big majority of seats in the upper house of Japan’s legislature in the election on July 10th. His greater focus on equality and redistribution, which he calls “New Capitalism”, was initially cast as an alternative to Mr Abe’s vision. In reality, it will be built on the foundations his predecessor laid out. The programme which began after Mr Abe’s 2012 thumping election victory—dubbed Abenomics—had three so-called “arrows” to dislodge Japan from its economic stagnation: flexible fiscal policy, monetary expansion and structural reforms. Clear positives stand out from Mr Abe’s record, most notably the financial accounts of Japan Inc. Reforms to corporate governance encouraged more shareholder-friendly activity and prodded firms to reduce moribund networks of cross-shareholdings. Those changes, paired with a slump in the yen, boosted corporate earnings to record levels (see chart). An environment friendlier to investors also helped to raise anaemic levels of inward foreign direct investment. In 2020, direct investment into Japan was worth 1.2% of gdp, the highest on record. There have been stark improvements in the labour market, too. Japan’s female employment rates, previously low by the standards of rich economies, climbed rapidly under Mr Abe. At 72% among working-age women, the employment rate is now more than ten percentage points above the levels Mr Abe inherited, and six percentage points above the American equivalent. Kathy Matusi, the economist who championed increasing female participation as a way to unlock the productive potential of the Japanese economy, credits Abe-era reforms, such as mandatory disclosure on gender diversity and more generous salary replacements for new parents.Mr Kishida’s aides now talk less of ditching Abenomics and more of building its legacy. When his New Capitalism Council revealed its “grand design” document in May, it concluded that the strategy would adhere to the three-arrow framework. The strategy focuses, rightly, on the need to get firms to deploy their excess cash through wage increases or capital investments. Stagnant wages have been Abenomics’s biggest shortcoming. At around 266,000 yen ($1,940) per month in May, Japan’s average wage has barely budged in a decade, and has actually fallen in real terms. Most of the recent rise in female employment reflects growth in part-time jobs that are usually poorly paid. This is where Mr Kishida could have the most to offer. Regrettably, his approach to the issue so far differs little from Mr Abe’s: tax incentives and browbeating, with a bit of a boost for public-sector workers.Fiscal policy was a troubled area for Mr Abe, and is likely to remain one for Mr Kishida. Two long-planned but ill-fated increases in Japan’s sales tax, in 2014 and 2019, made fiscal policy a drag on the recovery rather than a boost. Spending under Mr Abe was not as flexible as the first arrow’s label would have suggested. After leaving office, Mr Abe did convince the party to soften its pledge to balance the primary budget (excluding debt-servicing costs) by 2025. But Mr Kishida is said to be more concerned about fiscal sustainability. His closest advisers have backgrounds in Japan’s typically hawkish finance ministry. Mr Abe’s support for a more stimulative monetary policy has also lasted beyond his tenure, with mixed effects. Enormous purchases of bonds, and a subsequent policy to directly fix the yields of government bonds, may have prevented Japan from falling back into deflation, but failed to stimulate inflation or nominal-income growth as desired. As inflation rises globally, the Bank of Japan may find it harder to keep policy easy. But Mr Kishida will likely pick a continuity candidate when Kuroda Haruhiko, Mr Abe’s central-bank governor, leaves office next April.With Mr Abe gone, might Mr Kishida feel liberated to diverge further from his predecessor? Different global conditions could fuel such a change. Concern about fiscal discipline has more truck in a world of rising interest rates. But the differences between Mr Abe’s and Mr Kishida’s approach now look more likely to be a matter of degree rather than substance. Mr Kishida’s focus on wages, in particular, could augment the successes of Abenomics if properly pursued. Mr Abe’s arrows, in short, will remain essential weapons. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.
While there are parallels between today’s meltdown and crashes past, a lot has changed since the last major bear market in crypto.
The crypto market has been flooded with debt thanks to the emergence of centralized lending schemes and so-called “decentralized finance.”
The collapse of the algorithmic stablecoin terraUSD and the contagion effect from the liquidation of hedge fund Three Arrows Capital, highlighted how interconnected projects and companies were in this cycle.

The two words on every crypto investor’s lips right now are undoubtedly “crypto winter.”
Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.

Bitcoin, the world’s biggest digital coin, is off 70% from a November all-time high of nearly $69,000.
That’s resulted in many experts warning of a prolonged bear market known as “crypto winter.” The last such event occurred between 2017 and 2018.
But there’s something about the latest crash that makes it different from previous downturns in crypto — the latest cycle has been marked by a series of events that have caused contagion across the industry because of their interconnected nature and business strategies.

From 2018 to 2022

Back in 2018, bitcoin and other tokens slumped sharply after a steep climb in 2017.
The market then was awash with so-called initial coin offerings, where people poured money into crypto ventures that had popped up left, right and center — but the vast majority of those projects ended up failing.

“The 2017 crash was largely due to the burst of a hype bubble,” Clara Medalie, research director at crypto data firm Kaiko, told CNBC.
But the current crash began earlier this year as a result of macroeconomic factors including rampant inflation that has caused the U.S. Federal Reserve and other central banks to hike interest rates. These factors weren’t present in the last cycle.
Bitcoin and the cryptocurrency market more broadly has been trading in a closely correlated fashion to other risk assets, in particular stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq fell more than 22%.
That sharp reversal of the market caught many in the industry from hedge funds to lenders off guard.

As markets started selling off, it became clear that many large entities were not prepared for the rapid reversal

Clara Medalie
Research Director, Kaiko

Another difference is there weren’t big Wall Street players using “highly leveraged positions” back in 2017 and 2018, according to Carol Alexander, professor of finance at Sussex University.
For sure, there are parallels between today’s meltdown and crashes past — the most significant being seismic losses suffered by novice traders who got lured into crypto by promises of lofty returns.
But a lot has changed since the last major bear market.
So how did we get here?

Stablecoin destabilized

TerraUSD, or UST, was an algorithmic stablecoin, a type of cryptocurrency that was supposed to be pegged one-to-one with the U.S. dollar. It worked via a complex mechanism governed by an algorithm. But UST lost its dollar peg which led to the collapse of its sister token luna too.
This sent shockwaves through the crypto industry but also had knock-on effects to companies exposed to UST, in particular hedge fund Three Arrows Capital or 3AC (more on them later).

“The collapse of the Terra blockchain and UST stablecoin was widely unexpected following a period of immense growth,” Medalie said.

The nature of leverage

Crypto investors built up huge amounts of leverage thanks to the emergence of centralized lending schemes and so-called “decentralized finance,” or DeFi, an umbrella term for financial products developed on the blockchain.
But the nature of leverage has been different in this cycle versus the last. In 2017, leverage was largely provided to retail investors via derivatives on cryptocurrency exchanges, according to Martin Green, CEO of quant trading firm Cambrian Asset Management.
When the crypto markets declined in 2018, those positions opened by retail investors were automatically liquidated on exchanges as they couldn’t meet margin calls, which exacerbated the selling.
“In contrast, the leverage that caused the forced selling in Q2 2022 had been provided to crypto funds and lending institutions by retail depositors of crypto who were investing for yield,” said Green. “2020 onwards saw a huge build out of yield-based DeFi and crypto ‘shadow banks.'”
“There was a lot of unsecured or undercollateralized lending as credit risks and counterparty risks were not assessed with vigilance. When market prices declined in Q2 of this year, funds, lenders and others became forced sellers because of margins calls.”

Read more about tech and crypto from CNBC Pro

A margin call is a situation in which an investor has to commit more funds to avoid losses on a trade made with borrowed cash.
The inability to meet margin calls has led to further contagion.

High yields, high risk

At the heart of the recent turmoil in crypto assets is the exposure of numerous crypto firms to risky bets that were vulnerable to “attack,” including terra, Sussex University’s Alexander said.
It’s worth looking at how some of this contagion has played out via some high-profile examples.
Celsius, a company that offered users yields of more than 18% for depositing their crypto with the firm, paused withdrawals for customers last month. Celsius acted sort of like a bank. It would take the deposited crypto and lend it out to other players at a high yield. Those other players would use it for trading. And the profit Celsius made from the yield would be used to pay back investors who deposited crypto.
But when the downturn hit, this business model was put to the test. Celsius continues to face liquidity issues and has had to pause withdrawals to effectively stop the crypto version of a bank run.
“Players seeking high yields exchanged fiat for crypto used the lending platforms as custodians, and then those platforms used the funds they raised to make highly risky investments – how else could they pay such high interest rates?,” said Alexander.

Contagion via 3AC

One problem that has become apparent lately is how much crypto companies relied on loans to one another.
Three Arrows Capital, or 3AC, is a Singapore crypto-focused hedge fund that has been one of the biggest victims of the market downturn. 3AC had exposure to luna and suffered losses after the collapse of UST (as mentioned above). The Financial Times reported last month that 3AC failed to meet a margin call from crypto lender BlockFi and had its positions liquidated.
Then the hedge fund defaulted on a more than $660 million loan from Voyager Digital.
As a result, 3AC plunged into liquidation and filed for bankruptcy under Chapter 15 of the U.S. Bankruptcy Code.

Three Arrows Capital is known for its highly-leveraged and bullish bets on crypto which came undone during the market crash, highlighting how such business models came under the pump.
Contagion continued further.
When Voyager Digital filed for bankruptcy, the firm disclosed that, not only did it owe crypto billionaire Sam Bankman-Fried’s Alameda Research $75 million — Alameda also owed Voyager $377 million.
To further complicate matters, Alameda owns a 9% stake in Voyager.
“Overall, June and Q2 as a whole were very difficult for crypto markets, where we saw the meltdown of some of the largest companies in large part due to extremely poor risk management and contagion from the collapse of 3AC, the largest crypto hedge fund,” Kaiko’s Medalie said.
“It is now apparent that nearly every large centralized lender failed to properly manage risk, which subjected them to a contagion-style event with the collapse of a single entity. 3AC had taken out loans from nearly every lender that they were unable to repay following the wider market collapse, causing a liquidity crisis amid high redemptions from clients.”

Is the shakeout over?

It’s not clear when the market turbulence will finally settle. However, analysts expect there to be some more pain ahead as crypto firms struggle to pay down their debts and process client withdrawals.
The next dominoes to fall could be crypto exchanges and miners, according to James Butterfill, head of research at CoinShares.
“We feel that this pain will spill over to the crowded exchange industry,” said Butterfill. “Given it is such a crowded market, and that exchanges rely to some extent on economies of scale the current environment is likely to highlight further casualties.”
Even established players like Coinbase have been impacted by declining markets. Last month, Coinbase laid off 18% of its employees to cut down on costs. The U.S. crypto exchange has seen trading volumes collapse lately in tandem with falling digital currency prices.
Meanwhile, crypto miners that rely on specialized computing equipment to settle transactions on the blockchain could also be in trouble, Butterfill said.
“We have also seen examples of potential stress where miners have allegedly not paid their electricity bills, potentially alluding to cash flow issues,” he said in a research note last week.
“This is likely why we are seeing some miners sell their holdings.”
The role played by miners comes at a heavy price — not just for the gear itself, but for a continuous flow of electricity needed to keep their machines running around the clock.

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Lightyear, a stock trading app based in the U.K., has raised $25 million in fresh funding to expand its presence across Europe.
The investment round was led by Silicon Valley’s Lightspeed, with additional backing from British billionaire Richard Branson.
The company will launch its app in 19 more European countries Thursday, including Germany, France and Italy.

The Lightyear app.

Lightyear, a European challenger to trading platform Robinhood, has raised $25 million of funding in an investment round backed by British billionaire Richard Branson.
Silicon Valley’s Lightspeed Venture Partners led the deal, the company told CNBC exclusively — a rare vote of confidence for an upstart brokerage at a time when global stock markets are deep in the red.

Founded in London last year by Estonian entrepreneurs Martin Sokk and Mihkel Aamer, Lightyear offers commission-free trading in over 3,000 global stocks and multi-currency accounts. Sokk and Aamer previously worked at Wise, the U.K.-listed money transfer firm.
“For too long, financial markets have been overly complex with high barriers to entry and confusing jargon,” Branson said in a statement shared with CNBC.
“Martin, Mihkel and the Lightyear team are lifting the lid on the world of investing – making it more transparent whilst empowering people through education – to choose the products which are right for them.”
The air and space travel tycoon took an undisclosed stake in Lightyear through his conglomerate Virgin Group.

European expansion

It’s still a young start-up, having only launched in the U.K. in September. But Lightyear has ambitious expansion plans.

The firm will launch its app in an additional 19 European countries including Germany and France Thursday, expanding its footprint to the euro zone. It’s aiming to launch in non-euro countries like Sweden and Norway next.
The deal shows how there’s still ample investor appetite for an investment app focused on Europe, even as Robinhood faces a lull in trading volumes stateside, according to Nicole Quinn, general partner at Lightspeed.
“Retail investing last year more than doubled in the U.S. Up to a fifth of all trades are retail investors in the U.S.,” she told CNBC. “We believe that Europe is heading in that direction.”
Still, the cash injection comes at a difficult time for equity markets, which have tumbled in response to fears of a looming recession — Robinhood is down roughly 78% from its IPO price.
Martin Sokk, Lightyear’s CEO, said he’s not worried about the declines in public markets.
“The markets going up, down or sideways doesn’t impact us too much because we’re building something that takes an awfully long time,” he said in an interview.

Fierce competition

Though Europe may be behind the U.S. when it comes to the prevalence of retail trading, the region has become increasingly crowded with various online trading apps on the hunt for clients.
Lightyear faces competition from both established brokers like Hargreaves Lansdown and AJ Bell and fintechs such as Revolut, Freetrade and eToro. Meanwhile, Robinhood has also signaled its intention to enter the European market, although with a focus on crypto rather than shares.
The company previously tried to launch in the region some years ago, but scrapped the plans to focus on its home market instead. It has since agreed to acquire U.K.-based crypto exchange Ziglu.
In May, Lightyear tapped Wander Rutgers, who previously led Robinhood’s U.K. expansion efforts, as its chief operating officer.
Investors have soured on high-growth tech companies like Robinhood lately over concern that their loss-making business models may not endure a deteriorating economic climate marked by rising inflation and tighter monetary policy.
Lightyear isn’t yet profitable. Right now, its main source of income is a flat 0.35% on currency conversions for trading in foreign shares.
Sokk says the firm plans to eventually diversify its revenue stream with additional features, including a paid subscription service that’s set to launch later this year.

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