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The crypto bank of 2022, caused by the collapse of several giants in the ecosystem, is having a lasting impact on the cryptocurrency industry. A new research report from the Federal Reserve Bank of Chicago (FRBC) has identified several key factors and catalysts that hastened last year’s cryptocurrency crisis.
The research report indicated that withdrawals by crypto whales and large account holders on centralized exchanges, including some of the key institutional accounts, led to a liquidity crisis that eventually led to a run on banks.
The first crisis came with the crash of TerraUSD, which started a churn saga for many cryptocurrency lenders exposed to the Terra-Luna ecosystem. Celsius and Voyager Digital experienced outflows of 20% and 14% of their clients’ funds, respectively, within 11 days of the crash news. Celsius also invested almost a billion dollars in the failed algorithmic stablecoin Terra.
The second major churn crisis came with the collapse of Three Arrow Capital (3AC) in July. Celsius and Voyager Digital experienced another round of outflows of 10% and 39%, respectively, as a result of their exposure to the now bankrupt 3AC.
3AC has become a major source of contagion in the crypto industry as several firms loaned billions of crypto assets to the hedge fund, leading to a major crisis after its collapse. Genesis provided loans totaling approximately $2.4 billion to 3AC, BlockFi provided $1 billion, Voyager Digital provided $350 million and 15,250 Bitcoin (worth approximately $328 million in July 2022) and Celsius provided approximately $75 million .
The third major crisis came with the collapse of FTX in November. The cryptocurrency exchange itself has experienced an outflow of more than 37% of customer funds after news of its financial instability broke out. Genesis and BlockFi clients withdrew about 21% and 12% of their investments after the FTX crash.
Although most of these failed crypto platforms had a significant retail customer base, it was the sophisticated withdrawal of funds by institutional clients that led to a major crisis. Through June 9, 2022, several institutional clients have provided Celsius with funding ranging from $1.9 billion to $2.0 billion.
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Large account holders, defined as individuals with investments totaling more than $500,000, withdrew funds at the fastest and proportionately faster rate than other account holders. For example, account holders with investments over $1 million accounted for 35% of all Celsius withdrawals.
The research report notes that while large customer withdrawals hastened the crisis, the real culprits were cryptocurrency lending companies offering high returns through risky investments. Unlike banks, these lending platforms offered no guarantees or insurance against such failures, and as a result, customers panicked during a downturn in the market.