Crypto currency meltdown points to deeper financial crisis

It has been described as the week when the financial world shifted—the business channel CNBC described it as a “new reality”—when it became apparent global central banks were intent on lifting interest rates, come what may.

An advertisement for Bitcoin cryptocurrency is displayed on a street in Hong Kong, Thursday, Feb. 17, 2022. [AP Photo/Kin Cheung]

The major action was the decision by the US Federal Reserve to raise its base rate by 0.75 percentage points, the biggest single increase since 1994, with more to come.

The Bank of England lifted its rate for the fifth time and predicted the UK inflation rate would rise to 11 percent. Smaller central banks, such as the Reserve Bank of Australia, have indicated further rate rises are in the pipeline.

One of the most significant decisions was that of the Swiss National Bank which lifted its base rate by 0.5 percentage points. Previously it had been one of the firmest advocates of maintaining rates at historic lows.

The official reason for the rate rises is the need to combat inflation, but the central banks are well aware that their actions will not reduce price hikes. Their concerted action has another target. As inflation reaches its highest levels in four decades, it is aimed at clamping down on the wage demands of the working class around the world by inducing a recession, if that proves necessary.

The interest rate hikes have resulted in a sharp fall on stock markets around the world led by Wall Street. The broad-based S&P 500 is down by around 22 percent from its previous high, and the fall in the Dow is approaching 20 percent. The tech-heavy and interest-rate sensitive NASDAQ index has fallen by more than 30 percent, with significant stocks dropping by more than 50 percent from their highs.

One of the indications of the growing instability is the precipitous fall of crypto currencies, and the decisions by traders to suspend operations because of turbulent market conditions.

The crypto currency lender Celsius Network, which sent a shock wave through the crypto market last week when it suspended withdrawals, has said it will “take time” to normalize its operations. In a blog post message yesterday, it said it would continue to work “with regulators and officials regarding this pause and our company’s determination to find a resolution.” But it provided no details.

The chaos began last month when the so-called stablecoin TerraUSD, used to facilitate crypto currency trading by providing a link to the US dollar, failed to maintain dollar parity.

The shutting down of withdrawals has extended beyond Celsius. On Friday the crypto lender Babel Finance, based in Hong Kong, said it was pausing withdrawals because of “unusual liquidity pressure” and the Singapore-based crypto hedge fund Three Arrows has failed to meet margin calls from lenders.

Yesterday the Hong Kong-based crypto exchange Hoo halted transactions which were threatening to exhaust its funds. It said it was trying to reconfigure its medium- and long-term assets in an “orderly and reasonable manner.”

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