The collapse of the crypto lenders Celsius Network and Voyager Digital and crypto hedge fund Three Arrows Capital (3AC) is alarming regulators worldwide. Celsius Network initiated Chapter 11 bankruptcy proceedings on Wednesday. The California Department of Financial Protection and Innovation (DFPI) announced that it is investigating crypto lenders. The regulator warns consumers and investors that crypto lenders may not have adequately disclosed the risks customers face when they deposit crypto assets onto these platforms.
DFPI pointed out that in recent actions against BlockFi (here) and Voyager Digital (here), the regulator established that certain crypto-interest accounts were unregistered securities. The purpose of securities registration, in part, is to ensure that investors receive all material information needed to evaluate whether to enter into these crypto-interest account arrangements, such as risks being taken with deposited funds.
Amid imploding crypto prices, several large crypto lenders have frozen withdrawals and transfers as they experienced liquidity crises. In mid-June, Celsius Network announced it would pause all withdrawals and transfers between user accounts, citing “extreme market conditions.” In July, fellow U.S. lender Voyager Digital announced it would temporarily pause customer trading, deposits, and withdrawals. It then filed for Chapter 11 bankruptcy just days after the announcement. According to Vermont’s Department of Financial Regulation (DFR), Celsius is insolvent.
Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), recently issued critics about lending platforms that are currently operating “a little like banks.”
“How does somebody offer (such a large percentage of returns) in the market today and not give a lot of disclosure?”
Gery Gensler
Celsius Network offered up to 17% Annual Percentage Yield (APY) on users’ deposits. In the hype of the last few years, many crypto exchanges and brokers such as Voyager Digital or Blockchain.com have also acted as lenders and borrowed their clients’ funds in exchange for high-interest rates. Therefore, the collapse of Celsius has triggered liquidity crises at the companies via the domino effect. There is currently no end in sight. It’s Crypto Winter.
