Crypto Advantages Turn Sour
Crypto is Better – Until It’s Not
Are cryptocurrencies better than the monetary systems we now have in place?
According to crypto proponents these blockchain superstars will make legacy monies obsolete. They point to crypto’s advantages: decentralized, immune to inflation, no national borders to deal with, faster transactions, more secure, etc.
While cryptocurrencies are decentralized and carry no nationality imprint, many of the other advantages have proven ephemeral. There have been major hacks and losses that tell us their security is not invincible. Inflation doesn’t care what icon your currency carries – when prices go up, you spend more. And money transfer apps such as Venmo allow for immediate transactions to take place with all currencies, so that speed advantage has been neutralized, plus it’s difficult to spend crypto at most retailers.
All that may not sour boosters on crypto, but lately another leg these currencies have stood on has been kicked out from under them: The belief that being decentralized and not a part of the world’s national financial systems is a distinct advantage. The recent crash in the crypto markets shows otherwise.
Banks and Money vs. Crypto
Editorial Credit: T. Schneider / Shutterstock.com
Have your money in U.S. dollars in a U.S. bank? Well, the FDIC insures your deposits against bank failures and other losses. Want some of those dollars? Go to the bank (or its online portal) and withdraw or transfer money without a problem. Is that bank solvent? Unlike crypto vaults and exchanges, there’s the Office of the Comptroller of the Currency (OCC), which may take enforcement actions for violations of laws, rules or regulations, final orders or conditions imposed in writing; unsafe or unsound practices; and breach of fiduciary duty by institution-affiliated parties. In other words, although banks may have financial troubles, bankruptcy is rare because the OCC ensures banks operate with sufficient reserves of cash. The Federal government is also a watchdog to prevent funds being used for illegal purposes, such as terrorism or money laundering.
This brings us to crypto currencies, crypto hedge funds, and crypto exchanges. The recent crash in cryptocurrency prices caused the collapse of a number of crypto investments firms, the latest being Three Arrows Capital. This hedge fund filed for Chapter 15 bankruptcy last week. It had, just a few days before, defaulted on a $667 million load to Voyager Digital. This has led to crises in other crypto firms, particularly lenders who the hedge fund borrowed from in enormous sums.
What about getting your money from crypto vaults? Voyager Digital first cut its withdrawal limits from $25,000 to $10,000. (Does your bank have limits on how much of your dollars you can have?) Even worse, Voyager has now temporarily suspended trading, deposits, and withdrawals on its platform.
Crypto lender Vauld is the latest company to suffer, saying Monday it has frozen withdrawals, trading, and deposits. Bancor said in June it would pause one of its investor protection features, but hasn't limited withdrawals from any accounts. CoinFlex suspended all withdrawals on June 23.
Crypto Lenders are also in Trouble
Vauld and Hong Kong-based Babel Finance have been forced to pause withdrawals. Backed by Coinbase Ventures, Vauld paused services Monday and is now exploring restructuring. Other lenders showing signs of distress are:
• Celsius Network – it froze all account withdrawals and transfers on June 13, citing "extreme market conditions". Celsius’ customers are still waiting to hear when they will regain access to their money.
• BlockFi – A deal signed on Friday will give FTX an option to buy the lender for a price as high as $240 million. BlockFi faces $80 million in losses from its loan to 3AC, but it doesn't expect any more fallout, having fully accelerated the loan and fully liquidated or hedged all the associated collateral.
• Genesis – This crypto lender faces potential losses running into the hundreds of millions of dollars, thanks to its exposure to 3AC and Babel, CoinDesk reported Thursday.
• Deribit – Court filings by the company claim that Three Arrows Capital has failed to repay a loan of $80 million. The derivatives exchange said the crypto hedge fund was one of its initial shareholders.
Conclusion
Is the recent crash just a shakeout of weaker cryptocurrencies, or a harbinger of things to come? All investments come with risks, and caution should be your watchword. What’s apparent, though, is that all the hype about cryptocurrencies’ advantages – almost invincibility – aren’t set in stone. Most of all, the fact that there are no regulations in place to insure your funds or regulate crypto exchanges means crypto has yet to mature into a safe, widely accepted form of exchange.