Crypto Crash: How the Market Collapsed – Reuters

It has been another bad week for the cryptocurrency market.

On Sunday, crypto lending and trading platform Celsius Network announced it would suspend all withdrawals and transfers. Coinbase, another crypto trading platform, also laid off 18% of its staff on Tuesday and warned of a prolonged “crypto winter”. And on Saturday, Bitcoin price dropped below $20,000 for the first time since 2020.

This crash started last month, when the US Federal Reserve announced its intention to raise interest rates to fight inflation, prompting investors to sell risky assets such as crypto holdings. But that is not the only factor behind the recent crypto market crash.

Many crypto trading platforms offered decentralized financial products known as DeFi. DeFi allows users to borrow, trade and earn interest on cryptocurrency holding companies, such as a bank.

“The DeFi ecosystem claims to provide a parallel financial system to the traditional financial system. It’s basically an attempt to replicate the traditional functions of the financial system using open source global decentralized blockchains,” said Ryan Clements, an associate professor at the University of Calgary. of Law, CTVNews.ca told CTVNews.ca during a video interview on Saturday.

But the DeFi ecosystem often relies on algorithmic stablecoins, which are cryptocurrencies that attempt to establish their value at a constant rate through the use of computer calculations that monitor their supply, providing investors with a supposedly stable alternative to volatile cryptocurrencies such as Bitcoin.

But in May, the value of TerraUSD, a popular stablecoin, fell from about $1 to less than 10 cents. As of June 18, this cryptocurrency is worth less than a cent.

“It failed catastrophically and had a cascading effect on the broader crypto market, accelerating selling pressure,” Clements said.

Some of these crypto exchanges, such as Celsius, operated on a fractional reserve system, much like a bank, where it lent crypto assets that it received as deposits. But as selling pressure mounted, Celsius stopped taking withdrawals and transfers.

“There was a run on Celsius as a crypto bank and Celsius had to freeze all the withdrawals because they couldn’t meet the demands of the depositors,” explains Clements.

While crypto exchanges can offer services similar to what a bank offers, Clements notes that there is much less protection. Unlike bank deposits, which are insured by the Canada Deposit Insurance Corporation, crypto deposits are uninsured, meaning all your assets can disappear if your crypto platform goes down.

That’s what happened in 2019, when BC-based crypto exchange Quadriga shut down. His clients collectively lost at least $169 million.

CALLS FOR BETTER CRYPTO REGULATION

Experts say the crypto market collapse underscores the need for better consumer protections in the industry to protect Canadians.

“It is a field that is still small, but is growing very quickly. And it’s largely unregulated,” Carolyn Rogers, senior vice governor of the Bank of Canada, told Reuters on Thursday. “We don’t want to wait for it to get much bigger before introducing regulatory controls. †

Last February, Conservative MP Michelle Rempel Garner introduced a bill to the House of Commons asking the Treasury Secretary to develop a national regulatory framework for cryptocurrency.

“The market instability we see today further underscores the need to talk about both protecting people and regulatory stability for the growth of the crypto asset industry,” Rempel Garner said in a statement last month, when crypto assets began to decline.

But Clements says the current paper-based regulation is actually “pretty robust.”

“We have rules regarding virtual currency brokers who are money service companies and must register with FINTRAC and be subject to AML and AFC reporting requirements for terrorism,” he said.

Several crypto exchange platforms are already registered and regulated by securities managers. These platforms are subject to risk disclosure, which requires them to be transparent about who their borrowers are, how deposits are held, how much capital reserves they have and what types of guarantees are implemented.

However, due to the global reach of the Internet, many platforms used by Canadians are located outside of Canada and do not adhere to these regulations.

“The biggest challenge in this area… is actually enforcement, as a slew of credit intermediaries have emerged in recent years that can be accessed through Canadian platforms,” Clements said. “These credit intermediaries are not compliant. †

Celsius is not registered with any provincial securities regulator in Canada, despite receiving a US$400 million investment from the Quebec pension fund. He had also promised his clients huge returns on their deposits, up to 18.6% per annum. At the same time, it also offered loans at only 0.1% interest per year.

Clements says deposits charge high interest while offering low-interest loans ‘is the opposite of what a bank does’

And so there are a lot of people, myself included, who have long been skeptical about how these returns are generated, what risks these lenders are taking,” he said.

Reuters reported Thursday that in the United States, regulators in five states have announced they are opening investigations into Celsius. Celsius told customers on Wednesday that it was “trying to stabilize our liquidity and operations”.

WHAT CRYPTO INVESTORS NEED TO KNOW

Experts agree that anyone who chooses to enter the cryptocurrency market should understand the risky nature of these investments.

“Like any asset that goes up in price, people see an opportunity for quick profits,” Rogers said. “Our concern is that they may not understand the risks. They may not even understand that this is not a restricted area.”

This risk factor also applies to algorithmic stablecoins, as evidenced by the TerraUSD crash.

“You have to be prepared for volatility, like all risky assets, and you have to be very careful when promoters of certain sour crypto assets make claims about their stability or guaranteed returns,” Clements.


With files from Reuters.

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