Crypto

Crypto Firms Acted Like Banks, Then Collapsed Like Dominoes – Business News

In recent years, a number of companies have tried to act as a cryptocurrency equivalent of a bank, promising lucrative returns to customers who have deposited their bitcoins or other digital assets.

In less than 12 months, almost all of the largest of these companies have failed spectacularly. Last week, Genesis filed Chapter 11, joining Voyager Digital, Celsius and BlockFi on the list of companies that have either filed for bankruptcy protection or gone out of business.

This subset of the industry grew as cryptocurrency enthusiasts sought to build their own parallel world in finance, not tied to traditional bank and government-issued currencies. But without safeguards and without government backing, these companies failed in domino fashion. What started with one crypto company collapsing in May spilled over to one crypto lending firm and then to the next.

Additionally, government regulators began restricting crypto lending companies’ ability to advertise their services, saying their products should have been regulated by securities regulators.

The collapse is reminiscent of the 2008 financial crisis, albeit on a much smaller scale. There is no concern that the collapse of these crypto firms will have an impact on the overall economy.

Crypto lending companies like Voyager, Genesis, and BlockFi tried to do what banks do in traditional finance: take crypto deposits, give depositors a dividend on their stored crypto, and then lend to make a profit. That’s what the banking industry has been doing for hundreds of years, but with government-sanctioned currencies.

The biggest disadvantage of crypto lending is the lack of safeguards. There is no deposit insurance, no government emergency solution, or even a privately run entity to protect depositors should their crypto bank fail. This was fine when crypto prices went higher because collateral banks accepted loans in exchange for the increases in value.

Demand for crypto deposits was so high that companies were willing to pay a 10% or more return on depositors’ crypto holdings.

But then crypto prices started falling and continued to fall. Bitcoin, for example, crashed from above $65,000 in November 2021 to below $17,000 last November. As a result, much of the underlying collateral held by these companies became worth less than the loans they issued, effectively rendering several “crypto banks” insolvent.

The first two crypto lending companies to collapse were Celsius and Voyager Digital. The companies have been exposed to both falling crypto prices and risky loans to crypto hedge funds like Three Arrows Capital, which went into liquidation and went out of business in June.

BlockFi, another crypto lender, turned to then-crypto giant FTX and its founder Sam Bankman-Fried for bailout. Bankman-Fried gave BlockFi a financial lifeline, one of several moves that earned Bankman-Fried praise as a savior or financial backbone for the crypto industry.

But FTX’s own bankruptcy in November, caused by risky lending to affiliate hedge fund Alameda Research, withered BlockFi’s financial lifeline. BlockFi’s own bankruptcy became inevitable. In a show of how intertwined these crypto lenders became, Genesis issued billions in loans to Alameda.

Many of these high-tech firms, saddled with bad debt, were experiencing a very old phenomenon: savers wanted their money back, and a bank run began.

WHAT’S NEXT?

The tens of thousands of customers of these crypto lending firms are now waiting to see if their assets can be recovered or found in bankruptcy court, which could take months or even years. Genesis has now gone bankrupt with more than $900 million in customer funds.

It’s not clear if crypto lending will see a return any time soon. Following the failure of FTX, crypto exchange giant Binance announced it would launch its own fund to provide bailout funding for a troubled crypto firm, an idea rooted in government-sponsored central bank or deposit insurance.

Additionally, the crypto industry seems to be coming up with the idea of ​​some sort of regulation that would offer depositors or investors a modicum of protection that doesn’t currently exist. Several bills have been pending in Congress over the past year, but with control shifting to Republicans in the House of Representatives, it’s not clear if the broader GOP has an interest in regulating the crypto industry.

Source

Show More

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button