I always feel like "too big to fail" really just means "Is it too big for the government to allow it to fail".
Considering crypto in the US is difficult to regulate effectively and competes for market share with the USD (and whichever CBDC the US eventually unveils) the federal government and IMF likely have no interest in protecting crypto currencies from failing.
No, that's exactly what it means. It means that the downdraft created by a failure would take down too many innocents, and so the government has to step into to prevent it from doing so. Theoretically, one of the goals of financial market regulation should be to never allow that to happen, but then we have a thing called "regulatory capture" and so it does. But maybe worse than regulatory capture is just regulatory neglect resulting in the same thing, which could be the case here. If all crypto going to zero would create a depression, I don't know that the government would in fact allow that to happen.
I might just be cynical, but I tend to see most government regulation as regulatory capture that occasionally has the side effect of accidentally leading to a good market outcome. From that view, if the government hasn't picked their winners for the industry then it doesn't hold any value to bail people out of said industry. A collapse like this is likely to increase calls for regulation and they can pick said winners, then I think it will become too big to fail.
It depends on how you see bailouts. One view is it's just more regulatory capture, a transfer of money from the government to those who control the government. The other view is that it's a panicked, short-term focused response to a real threat of economic dislocation. Like, if the economy is going to crash, then the President will lose their job. So the President will hand out cash to whoever friend or foe to prevent that from happening. I suspect the truth is a mix of the two, but that would mean that even if crypto has no "friends in high places" they might still get bailed out. But I really don't know how big it actually is, maybe it could crash and not take anything else with it. I don't know that answer to that at all.
But is crypto "too big to fail"?
It is not, which is delightful.
I always feel like "too big to fail" really just means "Is it too big for the government to allow it to fail".
Considering crypto in the US is difficult to regulate effectively and competes for market share with the USD (and whichever CBDC the US eventually unveils) the federal government and IMF likely have no interest in protecting crypto currencies from failing.
No, that's exactly what it means. It means that the downdraft created by a failure would take down too many innocents, and so the government has to step into to prevent it from doing so. Theoretically, one of the goals of financial market regulation should be to never allow that to happen, but then we have a thing called "regulatory capture" and so it does. But maybe worse than regulatory capture is just regulatory neglect resulting in the same thing, which could be the case here. If all crypto going to zero would create a depression, I don't know that the government would in fact allow that to happen.
I might just be cynical, but I tend to see most government regulation as regulatory capture that occasionally has the side effect of accidentally leading to a good market outcome. From that view, if the government hasn't picked their winners for the industry then it doesn't hold any value to bail people out of said industry. A collapse like this is likely to increase calls for regulation and they can pick said winners, then I think it will become too big to fail.
It depends on how you see bailouts. One view is it's just more regulatory capture, a transfer of money from the government to those who control the government. The other view is that it's a panicked, short-term focused response to a real threat of economic dislocation. Like, if the economy is going to crash, then the President will lose their job. So the President will hand out cash to whoever friend or foe to prevent that from happening. I suspect the truth is a mix of the two, but that would mean that even if crypto has no "friends in high places" they might still get bailed out. But I really don't know how big it actually is, maybe it could crash and not take anything else with it. I don't know that answer to that at all.