The Big Chill in Crypto

Credit Crisis Intensifies and Customers Wonder if They’ll See Assets Again from Crypto Lending Platforms

July 6, 2022
The Big Chill in Crypto

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Alex Mashinsky, founder and CEO of the cryptocurrency lending platform Celsius Network LLC, favored a t-shirt with the company’s logo and text that read, “Banks are not your friends.”

Then, amid a precipitous drop in crypto valuations, Celsius faced a liquidity crisis. It responded by freezing user accounts, including customers’ ability to make any withdrawals, and, to the panic of its customers, began seeking advice on what to do if it entered bankruptcy.

Banks may not always be friendly, but at least deposits are insured. Conversely, with friends like Celsius, many mocked, who needs enemies. Weeks later, Celsius customers are still wondering if they’ll ever get their money back.

Celsius is hardly alone. Babel Finance, Binance, CoinFlex, Voyager Digital Ltd and Finbox have either completely restricted withdrawls or limited customers’ access to the amount they can take out. Voyager [UPDATE: Vogager Seeks Chapter 11 Protection] even discontinued its loyalty rewards program. BlockFi settled with the SEC and state regulators for $100 million in February 2022.

Three Arrows Capital, a crypto hedge fund, has been ordered to liquidate after a British Virgin Islands court agreed with claims in a suit brought by creditors who said the fund failed to repay debts.

While these companies appeared to provide traditional, bank-like financial services like loans and interest on deposits, they did not have the legal protections, infrastructure and oversight of regulated financial institutions.

Crypto customers who wanted to hold their crypto but sought a personal liquidity event took were drawn to many of these platforms’ promised returns of 20% and more. They collateralized their loans by pledging their crypto, but with plunging values, lenders can issue margin calls and take it all. Margin calls didn't cover the platforms' obligations, however. The size of the valuation drops were even more than the platforms could bare and the contagion spread.

Promise of Stablility Dashed

Most recently, Coinbase-backed crypto lender Vauld, based in Singapore, also froze withdrawls, even after pledging it would be able to operate as usual.The freeze came with nearly $200 million in customer withdrawls. High-profile investors like Peter Thiel have backed Vauld. Coinbase Ventures is also an investor in Vauld.

Large custodian exchanges like publicly-traded Coinbase were supposed to provide stability to crypto investors. However, in its recent quarterly earnings, where it repored a massive $430 million loss, Coinbase disclosed that customer funds could be seized in the event of a bankruptcy.

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