Description:
Does the collapse of an exchange-issued digital token spread contagion across cryptocurrency markets? And, if so, how do markets behave when traders can buy and sell assets on the exchange that issued the token but not withdraw their funds? We examine contagion effects across major digital assets during the collapse of the FTX exchange and its token, FTT. Specifically, we use a BEKK model to examine market reactions to a series of damaging revelations and the collapse of FTT across an approximately one-week period in early November 2022, on FTX, Binance, and other major crypto exchanges. We find evidence of contagion across crypto exchanges. We also examine the price action on FTX and Binance when nearly all withdrawals at FTX were prohibited. We find substantial deviations from the market price for major assets at FTX, indicating a flight to quality and attempts to exit the exchange. The implications for traders, exchanges, and policymakers are discussed