NEW YORK (AP) — Crypto-focused companies have experienced a rocky period over the past year. These organizations sought to provide investors with returns from their digital asset investments. Unfortunately, many of these firms have ended up either bankrupt or shut down.
The plan was to build a new financial system. However, the uncertainty of the government has resulted in the downfall of these corporations. Advertising limits for digital asset lenders as well as the need for them to be monitored by securities authorities have also been large difficulties.
The scope of the crypto bank crisis is not as large as that of 2008, however it is very similar. Fortunately, it is unlikely that the failures of these crypto banks would have major economic repercussions.
Businesses such as Voyager, Genesis and BlockFi hoped to imitate conventional banks by investing in cryptocurrency and taking deposits. This is something that banks have been doing for a long time but with the added security of government-backed cash.
One of the main issues with crypto loans is the lack of insurance. If a crypto-bank goes under, customers would not be safeguarded by the state, private entities, or deposit assurance. On the plus side, the collateral they accepted increased in value.
There was such a high demand for crypto deposits that some companies were offering yields up to 10%. Unfortunately, the price of crypto began to fall and has stayed low ever since. For instance, the price of Bitcoin dropped from $65,000 in November 2021 to below $17,000 by November. This was because many of the collaterals were worth less than the loans taken out, which caused bankruptcy.
The first two crypto lenders to face financial difficulties were Celsius and Voyager Digital. They were hit by the decrease in crypto prices and the risky loans they had given to crypto hedge funds like Three Arrows Capital, which was forced into liquidation by June.
BlockFi had no choice but to turn to FTX and its founder, Sam Bankman-Fried, for financial help. As a savior to the crypto sphere, he was praised. However, after Alameda Research pulled its support, BlockFi became insolvent. Genesis also borrowed billions of dollars from Alameda.
Withdrawals started, leading to a banking panic. At Genesis, tens of thousands are now waiting for confirmation on their funds, which total over $900 million.
It is unclear whether crypto loans will make a comeback. After FTX’s collapse, Binance announced that it would set up a fund to rescue a struggling crypto firm. This is similar to government-sponsored central bank and deposit insurance.
The crypto industry appears to be open to the concept of some kind of regulation. This would provide at least some security for investors and depositors, which is currently not in place.