Research suggests the lack of insurance for depositors on crypto platforms induced fear among retail and institutional clients, leading to heavy withdrawals and a liquidity crunch.
The crypto banking crash of 2022 – caused the collapse of many ecosystem giants – has a lasting impact on the crypto industry. A new research report from the Federal Reserve Bank of Chicago (FRBC) has identified several key factors and triggers that fueled last year’s crypto crisis. The report found that the exodus of crypto whales and large account holders in central exchanges, including some major corporate accounts, created a liquidity shortage that eventually brought down the bank.
The first problem came from the failure of Terra, causing customers to leave for many crypto lenders exposed to the Terra ecosystem. Celsius and Voyager Digital recorded a 20% and 14% drop in their customer revenue, respectively, in the 11 days since the crash. Celsius has also invested nearly $1 billion in the failed algorithmic stablecoin Terra.
The second major problem, of large-scale client outflows, comes from the collapse of Third Arrows Capital (3AC) in July 2022. °C and Voyager Digital saw another drop of 10% and 39%, respectively, in ’cause they revealed it. Bankrupt bank 3AC. 3AC became a source of publicity in the crypto industry, because many companies have lent billions of crypto assets to hedge funds, leading to a massive meltdown when it failed.
Genesis Capital provided 3AC with a $2.4 billion loan; BlockFi raised $1 billion; Voyager Digital offered $350 million and 15,250 bitcoins, worth $328 million as of July 2022; and Celsius contributed about $75 million. The third major problem came from the collapse of FTX in November 2022. The crypto exchange itself saw the outflow of more than 37% of the customer’s funds after the news of its financial insolvency became public. Genesis and BlockFi clients withdrew approximately 21% and 12% of their investments following the FTX crash.
While many of these failing crypto platforms have large client bases, the withdrawal of institutional clients has caused a major problem. Prior to June 9, 2022, several corporate clients had made capital offers of $1.9 billion to $2 billion to Celsius.
Larger account holders – those with deposits greater than $500,000 – withdrew money at the fastest rate and faster than other account holders. For example, account holders with more than $1 million in deposits account for 35% of all withdrawals at Celsius.
The research report said that although large customer withdrawals accelerate the problem, crypto credit companies that provide high returns from risky investments are responsible. Unlike banks, these lending systems did not provide security or insurance against such defaults and as a result, customers panicked during market downturns.
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