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John Martin 4 min read

The Collapse of the Crypto Lending Market: 3AC, Voyager, Celsius

The Collapse of the Crypto Lending Market: 3AC, Voyager, Celsius

Those people who have been closely following the crypto market for some time regularly see news about the collapse of a coin or token. 

After the Terra Luna crash it became clear that many very large projects had big holes in them. While the whole crypto industry was doing well, they could promise their clients super profits and easily attract new capital, but now everything seems to have changed.

During the crypto winter, the lending market is going through bad times. Several major players announced bankruptcies and restructurings one after another.

Three Arrows Capital

Three Arrows Capital is one of the most famous cryptocurrency hedge funds that has been investing in digital assets. Nevertheless, a large—scale drop in cryptocurrency prices dealt the company an irreparable blow - on June 29, 3AC was liquidated.

3AC has invested in various projects in the early stages of financing. Funds were usually collected in USDC/USDT. For their part, 3AC held a commitment of 8% per annum. It seemed to the projects to be a fairly safe action, simply because it is a large fund.

But on June 27, Voyager Digital LLC notified 3AC of default after the fund failed to repay loan payments on time. Voyager provided 3AC with loans in the amount of 15.2 thousand BTC and 350 million USD.

When it comes to such large funds, many people believe that since they are large and have been in the market for a long time, they are too big to fail. Many people thought that Terra was too good a project to get buried, and they also thought that funds like 3AC kept the situation under control, but they did not always make the right decisions.

Following 3AC, the largest American crypto broker Voyager went bankrupt. They provided 3AC with loans in the amount of 15.2 thousand BTC and 350 million USD. A week after the collapse of 3AC, Voyager announced the suspension of trading, deposits, and withdrawals.

Celsius

Following Voyager and 3AC, on July 15, the Celsius crypto-lending platform declared bankruptcy. The New York company went bankrupt by the US insolvency law. The company's assets and liabilities are ranging from 1 to 10 billion US dollars.

If in October 2021, according to CEO Alex Mashinsky, the company had $25 billion in assets under management, then in May, despite the collapse in cryptocurrency prices, there were about $11.8 billion in assets, according to the website, and another $8 billion were customer loans, which made the company is one of the world's largest crypto lenders.

As of today, Celsius has $167 million of cash on hand, which, according to its CEO, will provide "sufficient liquidity" to support operations in the restructuring process. However, there is a "hole" in its balance sheet of about $1.2 billion.

Some analysts compare the collapse of Celsius with the collapse of Lehman Brothers, only in the field of cryptocurrencies, implying a domino effect that began with the bankruptcy of a large bank on Wall Street, which eventually led to the mortgage debt crisis and the global financial crisis of 2008.

Promises of great profitability of Celsius, which the company distributed to attract new customers, largely caused its final collapse. Regardless of whether the collapse of Celsius portends a larger-scale collapse of the entire cryptosystem, or not, the days when clients of such firms received double-digit annual revenues are numbered.

But even 3 weeks after Celsius suspended any possibility of withdrawals by customers due to "extreme market conditions" and a few days before it eventually filed for bankruptcy protection, it was still advertising on its website an annual return of almost 19% that was being paid weekly.

The company's bankruptcy filing shows that Celsius also has more than 100 thousand creditors. The firm said that most of the account transactions will be suspended until further notice and that there are currently no requests for permission for withdrawals by customers. At the same time, the accrual of remuneration is also suspended during the bankruptcy process, and currently, clients will not receive their remuneration. This means that customers trying to access their cryptocurrencies will not be able to do so yet. It is also unclear whether the bankruptcy procedure will eventually allow customers to recover losses. If there are any payments based on the results of, apparently, a multi-year process, then there is also the question of who will be first in line.

Everything is complicated by the fact that in the absence of regulation in the crypto sphere and unlike the traditional banking system, where customer deposits are usually insured, there are simply no formal consumer protection measures to secure users' funds if something goes wrong.

But even more important is what is written in the fine print in the terms and conditions of Celsius: the firm warns that in the event of bankruptcy, any permissible digital assets used for earnings or as collateral for loans cannot be returned and that customers will not have any legal remedies or rights in connection with the obligations of Celsius. It looks like an attempt to get absolute immunity from legal offenses if things go badly for the platform.

We can say that by promising its customers high profitability, Celsius was able to get only a very small profit margin. As a result, Celsius did not have a buffer for a bad market situation.

Possible bankruptcies of large crypto creditors may have a significant impact on crypto industry. If creditors will start going bankrupt, then this clearly does not bode well for investors. Plus, each such scandal is a "red rag" for regulators and leads to a tightening of the laws of different countries in the field of cryptocurrencies.


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