Finance: Cryptocurrency platforms risk bankruptcy

Finance: Cryptocurrency platforms risk bankruptcy

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Several virtual currency exchange sites are in turmoil, after the recent fall of these assets, such as Bitcoin. In the United States, regulators want to put things in order.

Bitcoin lost half its value in two months.

REUTERS

They wanted to play in the field of banks by lending money and remunerating deposits, but due to a lack of sufficient guarantees, several cryptocurrencies find themselves in turmoil and risk bankruptcy. Interest rates at more than 18% for savers, but 0.1% for borrowers, that’s what Celsius Network offered before having to suspend all withdrawals on June 12 for lack of sufficient liquidity.

Blocked funds

Three weeks later, the funds, which reached $11.8 billion in mid-May, are still blocked. “I think Celsius will go bankrupt,” predicts Omid Malekan, a professor at Columbia University. “Most of the trust (of customers) has gone away.” Other names have since joined Celsius, from CoinFlex to Babel Finance, which had also dabbled in credit and had to freeze withdrawals, while Voyager Digital had to limit them.

On these platforms, after depositing cryptocurrencies, a user can either receive interest or borrow digital currencies, with their deposit serving as collateral. “It’s really a shame that we’ve come to this,” laments a user contacted via Reddit who claims to have left over $350,000 on Celsius. “Celsius should have foreseen this kind of scenario.”

Fall of Bitcoin

The sequence started with the sharp drop in cryptocurrencies, and a Bitcoin reduced by half its value in less than two months. This caused a chain reaction and forced borrowers to provide new financial guarantees or immediately repay the borrowed money. Some, such as the Singaporean investment company Three Arrows Capital, now in liquidation, were unable to cope and thus deprived the platforms of liquidity, which forced them to freeze the funds.

Investigations in the United States

“The majority of these companies made loans without collateral or with insufficient collateral,” says Antoni Trenchev, co-founder of Nexo, another crypto platform which he says got away with a stricter lending policy and “prudent risk management”. No fewer than five US states have opened or expanded investigations into Celsius. Some, including Alabama, had already ordered the platform to cease lending to customers domiciled in their state since last year.

“Great need for regulation”

“I expect a very harsh repression,” says Omid Malekan. Despite the turbulence, most observers do not believe in a prolonged destabilization of the sector, or even in the extinction of credit in this market. “This is not the worst crisis cryptos have seen,” says Charles Jansen of Standard and Poor’s.

“In a market in correction, you discover which projects had real value” and “the dreams that lived on easy money”, describes Omid Malekan. “We expect to see a massive consolidation in the crypto sector,” says Antoni Trenchev, with creditworthy players getting their hands on those in trouble.

The episode brought awareness to the limits of a universe devoid of supervision. “There is a great need for regulation”, stresses Charles Jansen. “It is a point on which everyone agrees in the sector.”

The authorities take action

In the absence of an ad hoc regulatory framework, it has so far been the American market policeman, the SEC, which has taken control of the matter, but from an essentially repressive angle. Several dozen bills have been tabled in the US Congress in recent months, but one of them in particular has the wind in its sails. It is the first text to be supported by members of both parties, presented by Republican Senator Cynthia Lummis and Democrat Kirsten Gillibrand.

It has been well received by the community, in particular because it proposes to treat cryptocurrencies like commodities, and not financial securities, as the SEC would like. Some critics saw it as too conciliatory a text. “He’s giving the crypto industry what it wants,” American University law professor Hilary Allen wrote on Twitter.

The European Union took the lead on Thursday, reaching an agreement on cryptocurrency regulation, which will notably strengthen guarantees for investors and supervision.

(AFP)


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