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 got 98 cents back on the dollar for their depositors, no one would 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 to 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, set off 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 customer accounts.
“The majority of these companies had provided unsecured or under-secured loans,” said Antoni Trenchev, co-founder of Nexo, another crypto platform that he says stayed out of trouble by following a no-hassle policy. stricter lending and “prudent risk management”.
Unlike banks, these lenders were not required to hold cash in reserve against bad debts.
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.”
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.
“This gives the bulk of the jurisdiction over crypto assets to the CFTC, which has no investor protection mandate and far fewer resources than the SEC,” she added.