By Ken Sweet
The price of bitcoin and other cryptocurrencies crumbled Monday, after a major cryptocurrency lender effectively failed and halted all withdrawals from its platform, citing “extreme market conditions.”
It's the latest high-profile collapse of a pillar of the cryptocurrency industry. These meltdowns have erased tens of billions of dollars of investors' assets and spurred urgent calls to regulate the freewheeling industry.
Bitcoin was trading at roughly $23,400 Monday afternoon, down more than 16% in the past day. Ethereum, another widely followed cryptocurrency, was down more than 20%. Investors have been selling riskier assets such as digital currencies and technology stocks as the Federal Reserve raises interest rates to combat high inflation.
On Sunday, the cryptocurrency lending platform Celsius Network announced that it was pausing all withdrawals and transfers between accounts in order to “honor, over time, withdrawal obligations.” Celsius, with roughly 1.7 million customers and more than $10 billion in assets, gave no indication in its announcement when it would allow users to access their funds.
In exchange for customers’ deposits, the company pays out extremely generous yields, upwards of 19% on some accounts. Celsius takes those deposits and lends them out to generate a return.
Lending platforms such as Celsius have come under scrutiny recently because they offer yields that normal markets could not support, and critics have called them effectively Ponzi schemes.
It is the second notable collapse in the cryptocurrency universe in less than two months. The stablecoin Terra imploded in early May, erasing tens of billions of dollars in a matter of hours. Stablecoins have been seen as relatively safe, because they're supposed to be backed by hard assets, such as a currency or gold.
Just like Terra, Celsius had sold itself as a safe place for cryptocurrency holders to deposit their funds. Even while Celsius was failing, the company's website advertised that users can “access your coins whenever, keep them safe forever.”
“There is a lot of work ahead as we consider various options, this process will take time, and there may be delays,” Celsius said in a statement.
The move surprised investors and depositors. In online chats, they questioned why their investments weren’t protected.
It’s unclear whether Celsius depositors will get all their funds back. A cryptocurrency lender is not regulated like a bank, so there’s no deposit insurance and no legal framework for who gets their money back first, like in a bankruptcy. It’s possible that Celsius’ investors, which include Quebec’s pension fund, may get their investment back before Celsius' depositors will.
“This was yet another bank run. You're not reinventing anything here. They were promoting their services as a better savings account but in the end, you're just another unsecured lender,” said Cory Klippsten, CEO of Swan Bitcoin, who has been publicly skeptical of Celsius' business model for years.
Terra, and its token Luna, offered similar yields on customer deposits. Those tokens collapsed after huge customer withdrawals forced Terra's operators to liquidate all of the assets being used to support their currencies. The collapse of Terra has spurred calls for reform from the cryptocurrency industry, and calls for Congressional regulation.