Crypto Gets Its First Banking Crisis

Photo-Illustration: Intelligencer; Photo: Getty Images

The months-long slide in crypto markets has, for the most part, been a kind of contained demolition. But the fallout is starting to spread.

The collapse is now affecting the corporate and financial infrastructure of the digital currency realm. The question of how much trouble – and how much contagion – is yet to come came with great relief when Voyager Digital, a New Jersey-based lender and central to the crypto market, announced that it had filed a Chapter 11 bankruptcy filing in Manhattan federal court on Wednesday. . What made Voyager’s implosion so shocking was that, in an industry plagued by apparent fraud and sleazy personas, there was a company that had strived for the kind of stability and transparency that one would expect from a traditional financial company. It went public on the Toronto Stock Exchange in 2019. Co-founders included the CEO of the professional arm of E*Trade and the founding chief technology officer of Uber as well as executives from Morgan Stanley and Warner Music. And he’s gotten the backing of Sam Bankman-Fried, the co-founder of crypto exchange FTX and hedge fund Alameda Research — and even though the guy looks like he’s fixing iPhone screens for his d summer, he has a net worth of $10 billion.

Voyager’s main business was to act as an intermediary between buyers and sellers of crypto. He lured in depositors’ money with exorbitant interest rates, then turned around to let a particular hedge fund, Three Arrows Capital, deal with a very large portion of that borrowed capital. Unfortunately for Voyager, Singapore- and Dubai-based Three Arrows exploded last month in a supernova of what is, at best, speculative stupidity. The result? Voyager is now telling customers that he is unable to access their money while he is in court, although he may be left with some of their money after everything is over. the process.

Of course, Voyager isn’t the only one facing tough times. The crypto market as a whole lost two-thirds of its total value, falling to around $900 billion after peaking around $3.3 trillion in November. Any descent that far and that quickly causes casualties. What is becoming clearer now is the role that crypto lenders – an unglamorous but crucial node in the financial ecosystem – have played in the market downfall. Another lender, Genesis, is said to have lost hundreds of millions of dollars, also due to its exposure to Three Arrows. Various other major crypto companies also reduced withdrawals, including Celsius, BlockFi, Babel Finance, and CoinLoan. Even lender Vauld, backed by Silicon Valley royalty like Peter Thiel, is calling it as holders race for exits. With Celsius and BlockFi – two of the largest lenders – each holding just over $10 billion in customer deposits as of June, and Voyager filing a report saying it holds over $1 billion in assets and liabilities, this has effectively sucked up tens of billions of dollars of tradable crypto from a market that is already crashing.

At their core, crypto lenders operate like your typical Chase branch, taking money from people and lending it to other investors for a fee – except they do it without the regulations that apply to traditional banks. That doesn’t mean what they’re doing is illegal (although a few, including Celsius and BlockFi, have been investigated or had to pay fines), but banks do have rules about leverage, essentially limits on how they can use customer deposits. These regulations exist for a reason: loans are bets that a company, or a person, will repay the bank. What we are seeing now is that these crypto companies lent out too much money at a very bad time. Now, to survive, they need to hold on to their deposits (want your money back? Bad luck!) while seeking legal protection from bankruptcy courts and bailouts from wealthy crypto investors. In the latter capacity, Bankman-Fried, in particular, was happy to step in and spread the money, funneling hundreds of millions of dollars into BlockFi and Voyager. It’s a spending spree that could end up giving it extensive, perhaps unprecedented, control over the crypto markets of the future. He says he still has billions in untapped funds if he needs to step in and save more businesses.

The current woes did not come out of nowhere. The global inflation crisis and rising interest rates sucked money from the financial system in May, when TerraUSD and Luna, two of the biggest digital currencies, crashed, wiping out some $60 billion from markets. These currencies were backed by a loan program subsidized in part by Three Arrows, which was also a large holder of these now nearly worthless tokens. As broader crypto markets tumbled, Three Arrows struggled to meet its obligations and was forced to file for bankruptcy protection in New York after a court in the British Virgin Islands ordered it to withdraw. liquidate.

The details of Voyager’s restructuring here are complex, but the bottom line is that the little guys – including some with the most to lose – are going to have to wait to get their money.

Market crashes have no easy solutions. The sheer size of Voyager’s balance sheet means it has deep obligations to the wider world of crypto finance. The money he raised helped support the broader crypto market, and now market demands dictate who gets paid, if someone gets their money back.

At the end of it all, there are still hard questions to answer: How much money would it take to get all these lenders back to normal? What would be different in the next run on crypto banks? With so many lenders stopping withdrawals, it’s unclear how big the contagion could be or if there’s anything that could stop it.