Cryptocurrency: How the market collapsed – Reuters

It was another bad week for the cryptocurrency market.

On Sunday, crypto lending and trading platform Celsius Network announced that it will suspend all withdrawals and transfers. Coinbase, another crypto-trading platform, also laid off 18% of its workforce on Tuesday, warning of an extended “crypto winter”. And on Saturday, the Bitcoin price fell below $ 20,000 for the first time since 2020.

This crash began last month when the US Federal Reserve signaled its intention to raise interest rates to fight inflation, prompting investors to sell risky assets such as cryptocurrencies. But it is not the only factor behind the recent crash in the crypto market.

Many crypto-trading platforms offered decentralized financial products, also known as DeFi. DeFi allows users to borrow, trade and earn interest on cryptocurrency holdings, like a bank.

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

But the DeFi ecosystem often relies on algorithmic stablecoins, which are cryptocurrencies that try to determine their value at a constant rate using computer calculations that control their supply, giving investors a supposedly stable alternative to volatile cryptocurrencies like Bitcoin.

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

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

Some of these crypto exchanges, such as Celsius, operated on a fractional reserve system, much like a bank where it borrowed crypto assets, which it received as a deposit. But as sales pressure intensified, Celsius halted withdrawals and transfers.

“There was a race on Celsius as a crypto bank, and Celsius had to freeze all payouts because they could not meet the demands of the depositors,” Clements explained.

While crypto exchanges can offer services similar to what a bank offers, Clements notes that there are far fewer protections. Unlike bank deposits, which are insured by Canada Deposit Insurance Corporation, crypto deposits are uninsured, which means all your assets can disappear if your crypto platform goes down.

That was what happened in 2019 when the BC-based crypto exchange Quadriga shut down. His customers lost a total of at least $ 169 million.

CALLS FOR BETTER CRYPTO REGULATION

Experts say the collapse of the crypto market underscores the need for better consumer protection in the sector to protect Canadians.

“It is a field that is still small, but that is growing very fast. And it’s largely unregulated, Carolyn Rogers, senior vice president of the Bank of Canada, told Reuters on Thursday. “We do not want to wait until it gets much bigger before we put in regulatory controls.”

Last February, Conservative MP Michelle Rempel Garner introduced a private law in 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 human protection and regulatory stability for the growth of the cryptocurrency industry,” Rempel Garner said in a statement Tuesday last month as cryptocurrencies began to decline.

But Clements says the current paper-based rules are actually “pretty robust.”

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

Several crypto exchange platforms are already registered and regulated by securities administrators. These platforms are subject to risk information, 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 based outside of Canada and do not comply with these rules.

“The biggest challenge in this area … is actually enforcement, because there are a whole bunch of lending agents that have emerged over the last few years and that are available through Canadian platforms,” ​​Clements said. “These lenders do not meet the requirements.”

Celsius is not registered with any provincial securities regulator in Canada, despite having received a $ 400 million investment from the Quebec Pension Fund. He had also promised his customers huge returns on their deposits, up to 18.6% per annum. At the same time, it also offered loans at as low as 0.1% interest per year.

Clements says charging a high interest rate for deposits is “the opposite of what a bank does” while offering low-interest loans

And then there are many people, including myself, who have long been skeptical about how these returns are generated, what risks these lenders take, ”he said.

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

WHAT CRYPTO INVESTORS SHOULD KNOW

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

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

This risk factor also applies to algorithmic stack coins, as demonstrated by the TerraUSD crack.

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


With files from Reuters.

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