The Federal Reserve Bank of Chicago (Chicago Fed) has released a letter examining the major crypto runs that happened in 2022. The letter covers the details of collapsed firms Celsius, Voyager Digital, BlockFi, Genesis, and FTX.
The bank mentioned that due to massive user withdrawals and investment losses, several crypto-asset platforms experienced a significant decline in 2022. These platforms provided a range of cryptocurrency-related products and services, such as custody, trading, and high-yield investments.
Customers on these platforms were particularly attracted to high-yield investment items. Clients looking for lucrative returns were drawn to them because they promised guaranteed interest rates that were higher than those offered by conventional investment choices. The main investment options included stablecoins and non-stablecoin crypto-assets, with interest rates ranging from 7.4% to 9%.
The examination of bankruptcy files revealed information about the withdrawals of customer money from other platforms. Among the main causes of crypto runs were the failure of Three Arrows Capital (3AC) and the collapse of the TerraUSD stablecoin. Customers quickly withdrew their money in order to prevent possible losses. The platforms’ exposure to 3AC, which had lent the hedge fund billions of dollars, was a significant source of contagion.
Data from the Chicago Fed shows that there have been $1.4 billion and $0.58 billion in withdrawals from Celsius between May 9 and June 12, 2022. The highest withdrawals were witnessed by FTX from November 6–11, 2022, with over $7.81 billion.
Regulatory measures are urgently needed, as evidenced by the important occurrence of the collapse of crypto-asset platforms in 2022. The offering of high-yield investment products by platforms has been under regulatory scrutiny since at least 2021, when Coinbase (NASDAQ:COIN) announced it had received a warning from the U.S. Securities and Exchange Commission (SEC) that a prospective investment product could be a security.
A volatile atmosphere vulnerable to runs and financial crises was produced by the lack of deposit insurance and the allure of high-yield investments. To protect investors and preserve the stability of the crypto-asset market, policymakers must address these issues.
