They wanted to play in the banking business by lending money and compensating deposits, but due to the lack of adequate collateral, many cryptocurrency platforms find themselves in turmoil and risk bankruptcy.
Interest rates above 18% for savers, but at 0.1% for borrowers: This is what Celsius Network offered before having to suspend all withdrawals due to a lack of sufficient liquidity on June 12. Three weeks later, the money, which amounted to $11.8 billion in mid-May, is still on hold. “I think Celsius will go bankrupt,” predicts Omid Malkan, a professor at Columbia University. Trust Basics [de leurs clients] Flew. »
Since then other names have joined Celsius, from CoinFlex to Babel Finance, which has also been involved in credit and had to freeze withdrawals, while Voyager Digital had to restrict them. On these platforms, after depositing cryptocurrencies, the user can either receive interest or borrow digital currencies, providing their deposits as collateral. “It’s really a shame we came up with this,” laments a user contacted via Reddit who claims to have left a celsius of more than $350,000. “You should have expected degrees Celsius for this kind of scenario.”
The sequence began with a sharp drop in cryptocurrency and Bitcoin halving its value in less than two months. This caused a chain reaction and forced the borrowers to provide new financial guarantees or to repay the borrowed money immediately. Some, like Singaporean investment firm Three Arrows Capital, which is now in liquidation, were unable to cope and thus deprived platforms of liquidity, forcing them to freeze funds.
“The majority of these companies offered loans without collateral or with inadequate collateral,” says Anthony Trenchev, co-founder of Nexo, another crypto platform he says has escaped stricter lending policy and prudent risk management.
‘An urgent need for regulation’
At least five US states have opened or expanded investigations in degrees Celsius. Some, including Alabama, had already ordered the platform to stop lending to clients based in their state since last year.
“I would expect a very harsh crackdown,” says Professor Malkan.
Despite the turmoil, most observers do not believe in prolonged destabilization of the sector, or even in the extinction of credit in this market. “This is not the worst crisis that cryptocurrencies have seen,” said Charles Jansen of Standard & Poor’s.
“In Market Correction, you discover projects that have real value” and “dreams lived on easy money,” Professor Malkan describes. “We expect to see massive consolidation in the crypto sector,” says Anthony Trenchev, as creditworthy players put their hands on those in trouble.
The episode brought awareness to the limits of a censorship-free universe. There is a great need for organization. This is a point everyone in the sector agrees on,” stresses Mr. Jansen. In the absence of a dedicated regulatory framework, it was the US market policeman, the Securities and Exchange Commission, who took up the case, but from an essentially oppressive angle.
Dozens of banknotes have been floated in the US Congress in recent months, but the wind is looming on one in particular. It is the first text supported by members of both parties, introduced by Republican Senator Cynthia Loomis and Democrat Kirsten Gillibrand. It has been well received by the community, in particular because it proposes to treat cryptocurrencies as commodities and not as securities, as the SEC would like.
Some critics considered it a very restorative text. “It gives the crypto industry what it wants,” He wrote privately on Twitter American University Law Professor Hilary Allen. In particular, he suggests entrusting oversight to another regulator, the CFTC, “which has no mandate to protect investors and far fewer resources than the SEC,” the academic insisted.
The European Union took the lead on Thursday by reaching an agreement on cryptocurrency regulation that will notably strengthen guarantees for investors and oversight.
Standard & Poor’s sees recent events as a window to position itself as a benchmark, as in the world of conventional finance. For Charles Jansen, “The general feeling is that if there was a more reliable assessment of risk, perhaps fewer people would be affected.”