in the collapse of the crypto industry.

(dominoes falling)

The fall of the stable coin Terra sparked a wave

of losses leading to bankruptcy filings

for five major crypto companies, paused withdrawals

and declining value for cryptocurrencies but-

- The contagion effects

to the wider economy have been limited

so there's like massive carnage over here

but not much impact over here.

- [Narrator] Usually when an industry collapses,

(dominoes falling)

it has the potential to ripple far out to other parts

of the economy and can even spark a financial crisis.

But so far, for crypto the fallout

has been pretty contained.

Here's why the crypto industries collapse

has happened in a closed loop.

(dominoes falling)

The finances of many crypto companies are intertwined.

- It's a very incestuous kind of scene

where you have the same companies lending to each other,

borrowing from each other, and then trading with each other.

- [Narrator] Just looking at a slice of the industry,

you can see how closely related

those five bankrupt companies were.

Three Arrows, a crypto focused hedge fund, had invested

in crypto assets and companies

and took loans out from other companies.

One of these investments was Terra's sister token Luna.

When these assets fell,

so did Three Arrows' balance sheet.

As a result, the company failed to repay debts

and was ordered to liquidate in June.

In the wake of that bankruptcy,

crypto lenders, BlockFi, Voyager

and Celsius were taking losses

on declining digital currency prices

and on loans they had given to Three Arrows.

Then Crypto Exchange FTX extended a line

of credit to BlockFi and its sister company

Alameda extended a line to Voyager.

Voyager filed for bankruptcy in July.

A few days later, Celsius did too

and when FTX filed for bankruptcy in November

due to a mismanagement of funds, BlockFi followed.

- It's like these companies are all wearing

these different hats with each other

so you can see how these companies are so interconnected

and so intermingled that it sets the stage

for contagion to have a really devastating effect.

- [Narrator] The Financial Stability Oversight Council

said in a report in October

that this interconnectedness is part

of why the industry can crumble so quickly.

One of the reasons those companies are so tightly linked,

traditional finance institutions have stayed

pretty separated from crypto.

For example, if you look at the list

of some of Celsius' biggest creditors

in their bankruptcy filing, there aren't any banks listed.

- In other industries, for example,

banks will provide credit lines or arrange corporate bonds

or do other sorts of financings.

In crypto it's been much more limited.

There just hasn't been

the same embrace that other industries have seen.

- [Narrator] A small handful of banks

like these have courted crypto companies,

but big players in the financial market

have been more hesitant.

- Okay, I'm a major skeptic

on crypto tokens, which you call currency like Bitcoin.

- [Narrator] Regulation for banks which is helped set

by the Office of the Comptroller of the Currency

requires them to have a number of safety measures

in place before engaging with digital assets.

- The resilience of the traditional banking system

to the recent events in crypto is not an accident.

Rather, it is due, at least in part

to federal bank regulators continued

and intentional emphasis on safety

and soundness and consumer protection.

- [Narrator] Crypto makes up just 0.01%

of exposure for banks.

- Since the traditional Wall Street banks have not

really participated in the space, it's been left

to the crypto companies themselves to act

as like defacto banks within the space.

You see how these companies have become so interconnected

and intermingled that the failure of one

can bring down the rest.

- [Narrator] But that isolation has helped prevent

the crypto crisis from spilling into the larger economy.

Think about the housing crash in 2007

that eventually led to the Great Recession.

When housing prices declined,

it sparked a crisis in subprime loans.

As some banks had a stake in these type of mortgages,

that crisis leaked into the traditional financial system.

- It began to snowball and cause a system-wide meltdown

and major financial institutions like Lehman Brothers

failed because of their exposure to the housing market.

- [Narrator] Other industries like housing

also have value in the economy.

There's dollars behind it,

but crypto's value is still mostly speculative.

- This is what happens when you have a lot

of money pouring into an unregulated industry

that has little discernible clear value

aside from the speculation itself.

- [Narrator] While the crash has been mostly contained

in this case, it's left a lot of questions

about how financial institutions might interact

with the industry in the future.