Crypto Exchanges That Bankrupted In The 2022
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2022 was a wild year for all things cryptocurrency. It officially marked the start of a bear market where prices fell to 60% and more. The events that led to this state of the market are the fall of Terra LUNA, which dragged a couple of significant crypto exchanges down with it. Despite the bear market conditions of 2022, the BSV blockchain continued to attract developers and businesses with its large block size limit and focus on enterprise use cases, positioning itself as a potential contender for mainstream adoption in the years to come. This article will look at Celsius’s fall, Voyager’s, and, most recently, FTX’s.
The Fall of Celsius
The cryptocurrency lender Celsius Network has started the bankruptcy process after fighting insolvency concerns for several months. Celsius is the third significant cryptocurrency business to declare bankruptcy in the last two weeks after customer trust in the sector plummeted due to falling cryptocurrency prices buffeted by inflationary pressures and choppy market circumstances.
The sequence of events leading up to Celsius’ decision to declare bankruptcy is shown below:
On April 12, 2022, Celsius Network announced that its American platform would start keeping non-accredited investors’ coins in custody. As a result, investors won’t be allowed to continue adding new assets or earning incentives on Celsius’ Earn platform.
“As we’ve already mentioned, Celsius has been collaborating closely with regulators worldwide. We want to be as open and honest with our neighborhood as we can, “the business wrote in a blog post. “In further detail, we have constantly communicated with American regulators about our Earn product. As a result, consumers situated in the United States will notice changes in how our Earn product operates.”
May 2022: The $40 billion implosion of the algorithmic stablecoins terraUST (UST) and LUNA disrupted the cryptocurrency market and caused $300 billion in losses throughout the cryptocurrency ecosystem.
The collapse of LUNA and UST undermines consumer trust in the cryptocurrency sector, hastens the start of a “crypto winter,” and causes a general sell-off that causes Celsius users to make a series of withdrawals akin to a bank run.
Later, in its bankruptcy proceedings, Celsius blames “the domino effect” of LUNA’s failure for its cash problems.
June 12, 2022: In reaction to “extreme market conditions,” Celsius restricts transfers, swaps, and withdrawals, which feeds allegations that the platform has become seriously insolvent. The corporation gives no indication of when user services will resume, fueling worries among the 1.7 million users of the site that their assets will continue to be frozen indefinitely.
June 30, 2022: To investigate the firm’s alternatives for minimizing the effects of its mid-June slump, Celsius employs restructuring specialist Alvarez & Marsal.
In a blog post, the company stated, “Across Celsius today, we are focused and working as swiftly as we can to stabilize liquidity and operations to be in a position to share more information with the community.
July 3, 2022: A month after halting user withdrawals and transfers, Celsius fires around 23% of its personnel due to growing liquidity concerns.
In a blog post, Celsius stated, “while we work through these hard circumstances, we are acting with the entire community and all clients in mind.”
July 7, 2022: In a complaint filed in the New York State Supreme Court, Decentralized Finance (DeFi) aggregator KeyFi accuses Celsius of engaging in market manipulation and failing to put in place basic accounting controls to safeguard user deposits.
The same day, KeyFi CEO Jason Stone accused Celsius on Twitter of lying about the supervision and absence of an investment strategy.
Stone tweeted, “Neither our actions nor the volatility in the price of crypto assets had they been hedged. “The whole company’s portfolio was exposed to the market in its entirety.”
Stone claims that the company is acting like a Ponzi scheme, defrauding him of a salary that might total hundreds of millions of dollars.
On July 12, 2022, Celsius’ wallet sent $8.4 million in USDC stablecoin from Circle to the DeFi lending platform Aave, closing the loan and releasing the remaining tokens pledged as collateral for Celsius’ debt. These tokens include about $10 million in stETH, a form of ether (ETH) token, $13 million in LINK tokens from Chainlink, and $3 million in SNX from Synthetix.
Celsius Network filed for Chapter 11 bankruptcy on July 13, 2022, in the Southern District of New York of the United States Bankruptcy Court.
According to the firm, “Today’s filing follows Celsius’s tough but essential decision last month to suspend withdrawals, swaps, and transfers on its platform to sustain its business and safeguard its consumers.”
“Without a stop, the acceleration of withdrawals would have allowed select customers — those who were first to act — to be paid in full while leaving others behind to wait for Celsius to recoup value via less liquid or longer-term asset deployment operations.”
July 14, 2022: According to a court document from Celsius’ advising partner Kirkland & Ellis, the company’s balance sheet shows a $1.3 billion shortfall. Celsius addressed its balance sheet deficit in the filing for the first time.
The Current State of Celsius
Some sources report that Celsius Network is attempting to restructure rather than liquidating its assets and closing its business. This means that users can recover their investments in due time. Celsius Network stated to have the fund, which will be leveraged during the attempt to support their operations throughout the restructuring process.
The Fall of Voyager
At its peak, Voyager Digital had $5.9 billion in assets and 3.5 million subscribers, similar to a reputable wealth management company or a small regional bank.
The platform was used by 97% of Voyager’s clients to hold assets worth less than $10,000, showing a sizable number of individual investors. It was a global leader in cryptocurrency lending and trading and one of the few digital asset brokerages to be listed on stock exchanges (albeit in Canada rather than the U.S., it’s home country).
For a long time, Voyager’s future appeared promising. Leadership has trouble imagining a bear market, much less its effects. The market, according to CEO Steve Ehrlich in 2021, “looks entirely different from what it looked like in 2017. We all remember that year.”
2021 was similar to 2017 in that a devastating crypto market meltdown followed both. Ehrlich’s bright optimism produced a bad crop.
It is now discovered that the Jersey City, New Jersey-based corporation gave Three Arrows Capital a sizable amount of unsecured loans (3AC). The founders of that bankrupt hedge fund are apparently on the run and look to have defaulted on all of their debts at this point.
That was a fatal wound all by itself. Voyager froze client money on July 1. It formally requested bankruptcy protection in New York just a few days later.
Voyager is in a hopeless circumstance. According to a statement Ehrlich submitted with the bankruptcy documents, “The Debtors are facing a short-term ‘run on the bank.'” Ehrlich, who declined to comment for this article, also asserts that Voyager has a more promising future: “Debtors have a sustainable business and a strategy for the future” (Under Chapter 11, the company seeks to reorganize rather than liquidate.)
How did the Voyager Fail?
Ehrlich provided a rare public play-by-play of a crypto lender’s errors in the business’ chapter 11 bankruptcy case. The tale starts, at least according to Ehrlich’s account, with the disintegration of the Terra blockchain ecosystem and the subsequent infection.
Dominoes can fall quickly and violently in a sector where counterparties are intricately bound together by debt and leverage. Voyager presents itself as a victim of the cryptocurrency apocalypse, doomed not by any exposure to Terra’s UST stablecoin and LUNA token directly but instead by unfortunate business partners.
Voyager said that as soon as the crypto winter started in early 2022, it moved fast to hedge its risk by cutting loans and minimizing counterparty risk. Better to guard against Terra’s stunning May collapse, then. In most cases, this endeavor was effective.
When it wasn’t.
In June, everything went south. Three Arrows Capital, a well-known hedge fund established in Singapore with investments throughout the sector, “was in peril” of defaulting on its debts. Its “huge” LUNA wagers had collapsed into a pit of losses.
Three Arrows was also underwater on investments in the Grayscale Bitcoin Trust and Lido staked ether (stETH). (Digital Currency Group, which also owns CoinDesk, is the owner of Grayscale.) Ehrlich’s need to bring up both in his bankruptcy account stands out and may indicate a concerning ignorance of the business’s operations to whom he extended a $650 million unsecured loan.
In either case, Three Arrows was badly depleted on all fronts. It was also one of Voyager’s top clients for a single loan.
What was Voyager’s Business?
It would help if you first comprehended Voyager’s business to understand its failure.
It has a lot of bank-like characteristics, with a few extras for depositors. Users made an initial bitcoin deposit as opposed to using government cash. In the rear, Voyager was involved in (it turns out) far riskier lending, whereas Citibank or the teachers’ credit union would earn income by turning deposits into house loans.
Voyager is one of many crypto institutions focusing on the civilian market that pay interest on deposits by lending crypto assets to institutions and traders. Investment companies and hedge funds like Three Arrows Capital rely on these loans to execute large deals. They borrow money from lenders, buy or sell a wide variety of (risky) assets, invest in early-stage businesses, and, if everything goes well, generate enormous profits relatively rapidly.
Some of these profits are paid as interest to their loan partners. Customers receive a portion of the interest paid by those partners, which include lenders like Voyager. For depositors, the procedure that set off the events that resulted in these yield payments is almost immaterial and undoubtedly opaque. They see a sizable payoff in their accounts.
Until anything goes wrong, that is.
The lenders’ balance sheets are left with huge gaps when asset prices fall, or a counterparty fails on a sizable credit. Voyager, Celsius, and Babel Finance have all blocked withdrawals due to the systemic collapse, and most now seem bankrupt.
That has had significant effects on people, many of whom came to Voyager and companies of a similar caliber with fewer resources in quest of a larger yield. It may be too late for them to understand how these crypto lenders differ from banks, and it’s yet to be apparent how or even if their money would be refunded. For its part, regulators are currently investigating Voyager for allegedly misrepresenting the insurance on consumer deposits.
Due to its pioneering use of bankruptcy, Voyager is famous among crypto lenders. Ehrlich has submitted a lengthy statement outlining the firm’s difficulties as part of that process. It offers an authentic look at the same poor underpinnings of all cryptocurrency lenders.
The Demise of FTX
The cryptocurrency startup FTX provided financial lifelines to numerous faltering businesses during the May $2 trillion cryptocurrency market crisis.
But this week, FTX needs a rescue, which its competitor Binance appeared to be about to provide. Then Binance made a U-turn and announced it was abandoning plans to buy.
What are FTX and Binance?
Cryptocurrency exchanges like FTX and Binance let users swap one digital currency for another or fiat money and vice versa. According to CoinMarketCap, a company that tracks industry statistics, the two exchanges handle the bulk of all cryptocurrency trading worldwide.
Sam Bankman-Fried is the CEO of FTX, one of the world’s biggest exchanges, with its main office in the Bahamas. It has invested millions in pushing American lawmakers to enact cryptocurrency-friendly regulations.
Changpeng Zhao, a millionaire, is the CEO of Binance, the biggest exchange. The business operates primarily outside of the United States and without a recognized headquarters and has come under scrutiny for breaking legal requirements. Early investors in FTX included Binance.
Both firms were founded on hazardous trading strategies forbidden in the U.S. They have smaller American subsidiaries called Binance.us and FTX.us that are independent of their sister firms and are designed to adhere to American laws.
On Capitol Hill and worldwide, regulatory scrutiny of the cryptocurrency business has grown. Mr. Zhao, 45, and Mr. Bankman-Fried, 30, have publicly disagreed on the issue of whether or not to regulate cryptocurrencies.
How did FTX Run into Trouble?
FTT, a native cryptocurrency token on FTX, is used by traders to cover transaction costs. Mr. Bankman-Fried purchased the interest Mr. Zhao had previously sold to him for FTX last year, partly with FTT tokens.
On November 2, the cryptocurrency news site CoinDesk reported on a leaked document that indicated that Mr. Bankman-hedge Fried’s firm Alameda Research possessed a sizable quantity of FTT tokens. Although FTX and Alameda are supposed to be independent companies, the research implied they were closely related financially.
On November 6, Binance declared that it would sell its FTT tokens “in light of recent disclosures.” In reaction, the price of FTT crashed, and traders hurried to sell their holdings in FTX out of concern that it would become yet another failed cryptocurrency corporation.
Withdrawal requests totaling an estimated $6 billion over three days were handled quickly by FTX. It appeared to have a liquidity constraint, which meant it lacked the resources to meet demands.
The Help of Binance
Binance said on Tuesday that it has agreed to purchase FTX to save the firm. However, Mr. Zhao noted that “Binance retains the option to terminate the arrangement at any moment.”
In a separate statement, Mr. Bankman-Fried said that the agreement would safeguard consumers and let FTX complete processing their withdrawals. We are in the finest hands, and he said to allay concerns that FTX and Binance were at odds.
The Backing of the Binance offer
Binance said it will no longer purchase FTX, claiming that this decision was made “due to business due diligence.” Additionally, reports of misused finances and regulatory inquiries were raised.
Retail consumers would suffer every time a significant company in an industry collapses, according to Binance. “We have seen that the cryptocurrency ecosystem is getting more robust over the previous few years, and we think that over time, the free market will filter out outliers that misuse user cash.”
The blockchain platform Tron and FTX announced their agreement to transfer particular tokens from FTX to other cryptocurrency wallets on Thursday.
The Impact of FTX Fail on the Market
The cryptocurrency market has long failed to win over investors, authorities, and regular consumers with its reliability. The market has been shaken by the demise of FTX, which appeared to be more solid than other businesses.
The cost of FTT has decreased by almost 80% since Tuesday. Since Tuesday, there has been a significant fluctuation in the values of Bitcoin and Ether, two of the most valuable tokens, with a decline of more than 20%.
Ultimately, the failure of these crypto exchanges has left a fundamental lesson for the industry to learn. Focus on the product and the customers, and the money will come. Also, it has left customers with an important lesson too. Always use a trusted and regulated crypto platform for all your crypto transactions. Let us hope these will flush out the malicious actors and harmful effects from the industry, and shortly we will see more sustainable and needed business models.