Crypto Crash: How the Market Crashed – Reuters News in France and abroad

It was another bad week for the cryptocurrency market.

On Sunday, crypto lending and trading platform Celsius Network announced that it would suspend all withdrawals and transfers. Coinbase, another crypto trading platform, also laid off 18% of its workforce on Tuesday and warned of a prolonged “crypto winter”. And on Saturday, the Bitcoin price fell below US$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 off risky assets like crypto holdings. But this is not the only factor behind the recent crypto market crash.

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’s actually an effort to replicate the traditional functions of the financial system using open source global decentralized blockchains,” said Ryan Clements, associate professor on the faculty at the 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 attempt to fix their value at a constant rate through the use of computer calculations that control their supply, providing investors with a supposedly stable alternative. to volatile cryptocurrencies like Bitcoin.

But in May, the value of TerraUSD, a popular stablecoin, fell from around $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, which accelerated the 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 which it received as deposits. But as selling pressure intensified, Celsius halted withdrawals and transfers.

“There was a run on Celsius as a crypto bank and Celsius had to freeze all withdrawals because they couldn’t meet depositor demands,” 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 the Canada Deposit Insurance Corporation, crypto deposits are uninsured, which means that all of your assets could 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 collapse of the crypto market underscores the need for better consumer protections in the sector to protect Canadians.

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

Last February, Conservative MP Michelle Rempel Garner introduced a private member’s bill in the House of Commons asking the Minister of Finance to develop a national regulatory framework for cryptocurrency.

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

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

“We have rules regarding virtual currency brokers who are money services businesses and must register 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 disclosures, which require them to be transparent about who their borrowers are, how deposits are held, how much capital reserves they have as well as 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 adhere to these regulations.

“The biggest challenge in this area…is actually enforcement, because there’s a whole bunch of lending intermediaries that have popped up over the last few years that are accessible through Canadian platforms,” ​​Clements said. “These lending 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 year. At the same time, it also offered loans for as little as 0.1% interest per year.

Clements says charging deposits a high interest rate 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 on Thursday that in the United States, regulators in five states announced they were opening investigations into Celsius. Celsius told clients 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 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 restricted area. »

This risk factor also applies to algorithmic stablecoins, as demonstrated 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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Crypto Crash: How the Market Crashed – Reuters News in France and abroad


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