How does fractional reserve banking affect the stability of cryptocurrency exchanges?

1 answers

• Mar 16, 2022 · 3 years ago
  Fractional reserve banking affects the stability of cryptocurrency exchanges by introducing a higher level of risk. When exchanges engage in fractional reserve banking, they are essentially creating new money by lending out a portion of the deposits they receive. This increases the overall supply of cryptocurrency in circulation and can lead to inflationary pressures. Additionally, if the exchange's lending practices are not carefully managed, it can result in a higher risk of default and potential loss of user funds. It is crucial for exchanges to implement robust risk management strategies and maintain transparency to mitigate the potential negative effects of fractional reserve banking.
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