Starting with the lofty goal of competing with traditional banks, cryptocurrency lending giants and their customers now face financial ruin due to their risk appetite and lack of regulatory safeguards.
Celsius Network, which suspended withdrawals in mid-June, had announced a seemingly hard-to-reconcile interest rate combination, charging just 0.1% for loans but paying more than 18% on deposits.
A few weeks later, savings accounts, which stood at $11.8 billion in mid-May, remained frozen.
“Celsius is going bankrupt one way or another,” said Omid Malekan, a professor at Columbia University. “Even if they get 98 cents back on the dollar for their depositors, no one will ever want to use it.”
Other operators have since suffered a similar fate, from CoinFlex to Babel Finance, which also dabbled in lending and had to freeze withdrawals, while Voyager Digital had to limit them.
These platforms allowed customers to deposit cryptocurrencies and receive interest or borrow digital money using their savings as collateral.
“It’s such a shame that things have come to this point,” said a Celsius user contacted on the Reddit platform, who claimed to have more than $350,000 tied up with the lender.
“It is clear that Celsius should have foreseen this kind of scenario,” added the user, speaking on condition of anonymity.
The devastating streak began with the sharp drop in cryptocurrencies, including bitcoin which lost nearly 60% of its value in the past six months.
The fall in value – which fell as global inflation accelerated and Russia’s invasion of Ukraine rocked the global economy – caused a chain reaction and forced borrowers to provide new financial guarantees or to repay their loans immediately.
Some borrowers, such as Singaporean investment firm Three Arrows Capital which is currently in liquidation, have been unable to provide creditors with enough cash to cover withdrawals and have frozen client accounts.
“The majority of these companies had provided unsecured or under-secured loans,” said Antoni Trenchev, co-founder of Nexo, another crypto platform which he says avoided trouble by following a more lending policy. strict and “prudent risk management”.
Unlike banks, these lenders were not required to hold cash in reserve against bad debts.
– “Deep need for regulation” –
A handful of US states have opened or expanded investigations into Celsius, and some, including Alabama, last year ordered the platform to stop lending to their residents.
“I expect there will be very strong repression at all levels,” Malekan said. “There’s a lot of fodder out there for governments.”
Despite the turmoil, most observers expect cryptocurrencies to recover from the current credit issues and don’t believe this will end lending in the sector.
“This is not the worst crisis crypto has seen,” said Charles Jansen of S&P Global Ratings.
Malekan said the situation presents an opportunity to weed out weaker companies.
“During a bear market, you learn which projects have a fundamental value proposition and solve a real problem, versus which ones were just a pipe dream.”
Some, like Trenchev, expect major industry consolidation with healthy operators gobbling up struggling ones.
The episode also raised awareness of the risks of a lack of government oversight.
“There is a deep need for regulation, which everyone in the field agrees on,” said Jansen, whose firm is fighting to be recognized as risk assessors in the crypto world.
In the absence of a specific regulatory framework for market surveillance, the Securities and Exchange Commission took the lead, but largely with punitive measures.
Several bills have been introduced in the US Congress in recent months in an attempt to address the need for closer oversight, but a bipartisan Senate proposal by Republican Cynthia Lummis and Democrat Kirsten Gillibrand has gained momentum .
The bill has been well received by the crypto community, particularly because it empowers the industry’s favorite regulator, the Commodity Futures Trading Commission, over the SEC.
Some critics see the proposal as too accommodating.
“It’s bipartisan in the sense that senators from different parties give the crypto industry pretty much what it wants,” tweeted Hilary Allen, a professor at American University’s Washington College of Law.
“It gives most jurisdiction over crypto assets to the CFTC, which has no investor protection mandate and far fewer resources than the SEC,” she added.