Bank runs are nothing new. Those frightening incidents when too many customers demand their money back at the same time have destroyed many financial institutions over the years.<\/p>\n
Traditional banks largely solved that with deposit insurance, a guarantee from the Federal Deposit Insurance Corp. to make customers whole up to a certain amount if their bank fails.<\/p>\n
With no such protection in crypto, the phrase \u201csuspending withdrawals\u201d has become a source of fear in 2022, a sign of deep trouble at firms that have tried to create a modern version of banking through digital assets. Customers who trusted the lender or exchange with their cryptocurrencies are suddenly unable to get the assets back.<\/p>\n
One example is crypto broker Voyager Digital. Its Canadian-listed stock plunged 42% on July 4 after it said it was \u201ctemporarily suspending trading, deposits, withdrawals and loyalty rewards.\u201d The situation got worse days later when the company filed for bankruptcy.<\/p>\n
Voyager’s troubles came as crypto prices remained hugely depressed from their peaks. And it illustrates that when a crypto firm pauses withdrawals \u2013 warning the world of serious liquidity issues \u2013 it will have trouble restarting them outside of bankruptcy court.<\/p>\n
\u201cThe problem is, once the withdrawal suspensions happen, it\u2019s too late for the investors,\u201d said Paul McCaffery, co-head of equities for Keefe, Bruyette & Woods.<\/p>\n
When crypto lenders go broke
\nFollowing the collapse of the stablecoin terraUSD (UST) and the implosion of crypto hedge fund Three Arrows Capital, known as 3AC, a swath of liquidity-strapped crypto lenders found that they could no longer meet customer demands.<\/p>\n
Throughout June and early July, lenders including Celsius Network, Babel Finance, CoinFLEX, Voyager, Vauld and Zipmex halted withdrawals and transfers. Others such as CoinLoan and Finblox allowed withdrawals to continue, but at a reduced limit.<\/p>\n
When crypto lenders go broke, the traditional financial regulatory system can\u2019t help. The FDIC, which backstops deposits at conventional banks in the U.S., released a fact sheet on July 29 reminding the public of that.<\/p>\n
Some lenders, such as Zipmex, have been able to recover and start releasing select tokens back to users\u2019 wallets. The majority of lenders, however, have kept withdrawals paused, with Celsius joining Voyager in bankruptcy.<\/p>\n
No one can predict how far the domino effect of solvency issues will run, but it\u2019s a safe bet crypto players will shudder if any other firms warn they are suspending withdrawals.<\/p>\n
\u201cThe announcements are decelerating but not likely quite done yet as the fallout from the 3AC solvency continues to play out,\u201d McCaffery wrote in an email to CoinDesk. \u201cI am hopeful that all of this bloodshed will result in better risk management processes embedded in the business models going forward.\u201d<\/p>\n
Timeline of suspended withdrawals
\nJune 12: Celsius says that it is \u201cpausing all withdrawals, swaps and transfers between accounts.\u201d (Celsius filed for bankruptcy on July 13.)
\nJune 17: Babel says that \u201credemptions and withdrawals from Babel Finance products will be temporarily suspended.\u201d
\nJune 23: CoinFLEX announces that it is \u201cpausing all withdrawals.\u201d
\nJuly 1: Voyager Digital says that it is \u201ctemporarily suspending trading, deposits, withdrawals and loyalty rewards.\u201d (Voyager filed for bankruptcy on July 5.)
\nJuly 4: Vauld says that it \u201cmade the difficult decision to suspend all withdrawals, trading and deposits.\u201d
\nJuly 20: Zipmex says that it is \u201cpausing withdrawals until further notice.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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