The exuberance and hype that brought the cryptocurrency industry to new highs in 2020 and 2021 came crashing down sharply this year. Throughout 2022, there seemed to be no shortage of high-profile bankruptcies and scandals that roiled the cryptosphere.
With various crypto hedge funds, lenders and brokerages experiencing a veritable gauntlet of bank runs, rug-pulls, liquidity crunches, counterparty risks and outright Ponzi schemes in some cases, calls for regulation from prominent figures are once again on the rise.
On May 12, Treasury Secretary Janet Yellen testified before the U.S. House of Representatives’ Committee on Financial Services, stating: “With respect to digital assets, new products and technologies may present opportunities to promote innovation and increase efficiencies. However, digital assets may pose risks to the financial system, and increased and coordinated regulatory attention is necessary.”
Contrary to what actor Matt Damon said in a widely mocked Crypto.com advertisement, fortune clearly did not favor the brave this year. With so much happening in such a short while, it’s understandable why some commentators are lambasting crypto for “speed-running the evolution of the modern financial system.”
Here’s a recap of the five worst crypto implosions of 2022, and a rundown of what various experts think is in store for the crypto industry moving forward:
— TerraUSD/Luna
— Celsius Network
— Voyager Digital
— FTX
— BlockFi
— Experts’ take on the future of crypto
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TerraUSD/Luna
TerraUSD was a highly popular “algorithmic stablecoin” pegged to the U.S. dollar. It achieved this by being backed by the Luna token using a “burn and mint” equilibrium algorithm. In short, Luna would absorb volatility
in TerraUSD, acting as an arbitrage mechanism to protect the peg.
The founder of Terraform Labs, Do Kwon, developed a reputation for highly public online feuds with his critics, having tweeted “have fun staying poor” and “I don’t debate the poor on Twitter” in the months preceding the ultimate demise of TerraUSD and Luna.
Over the month of May 2022, TerraUSD depegged from the U.S. dollar following mass withdrawals from Anchor, a yield-paying lending and borrowing protocol. The token plunged as low as 10 cents on the dollar while Luna incurred an eventual 99% loss in its value.
Celsius Network
Founded in 2017, Celsius Network rode the cryptocurrency bubble in 2021 to become one of the most prominent crypto lenders. The company attracted a large user base by offering competitive yields on crypto deposits and low interest rates on crypto-backed loans.
However, the company began suffering liquidity issues in June 2022, eventually halting all withdrawals and freezing customer assets on June 13 in response to “extreme market conditions.” A month later, on July 13, the company ended up filing for Chapter 11 bankruptcy.
According to its bankruptcy filing, Celsius had just $167 million in cash on hand at the time, compared with a whopping $4.7 billion owed to its creditors, including users. In addition, the company disclosed a $1.2 billion hole in its balance sheet, holding $4.3 billion of assets against $5.5 billion in liabilities as of mid-July.
Celsius also revealed $12 million in outstanding loans to Alameda Research, the trading firm associated with now-collapsed crypto exchange FTX.
Voyager Digital
The fall of crypto brokerage platform Voyager Digital showed investors that even publicly traded crypto companies with audited financial statements could topple at a moment’s notice. On July 1, the platform suddenly halted customer trading, deposits and withdrawals.
Investors’ and users’ worst fears materialized on July 5, when the company filed for Chapter 11 bankruptcy. Shares of Voyager fell sharply from 31 cents per share to 10 cents by Sept. 23 and are trading at just $0.035 per share as of Dec. 13, down heavily from a 52-week high of $15.87.
The catalyst behind the fall? A failure by embattled crypto hedge fund Three Arrows Capital to repay a $670 million loan. Three Arrows Capital itself was eventually liquidated after suffering heavy losses from its investments in Luna and failing to meet numerous margin calls.
[SEE: 7 of the Biggest Corporate Frauds in History.]
FTX
The fall of FTX, one of the most prominent crypto brokerage platforms worldwide, is being called the “Lehman Brothers of Crypto” due to its scope and contagion. Founded by Sam Bankman-Fried in 2018, FTX made a name for itself by offering a variety of crypto trading services and products.
During the initial stages of the 2022 crypto bear market, Bankman-Fried emerged as a “lender of last resort” figure in the crypto industry, engaging in talks with and extending credit to belay troubled companies like Celsius, Voyager and BlockFi alike.
Therefore, it came as a shock when FTX paused withdrawals on Nov. 9 and filed for Chapter 11 bankruptcy two days later. The cause was a bank run on FTX following revelations that the assets held by Alameda Research, a crypto trading firm owned by Bankman-Fried, were actually composed of FTX’s own token, called FTT.
Shortly afterward, Binance dumped its FTT holdings, inciting a spike in withdrawals and creating a liquidity crisis that FTX could not recover from. Talks between Binance and FTX of a possible acquisition and bailout also failed after the former conducted due diligence on FTX’s financial statements.
Bankman-Fried was quickly deposed as CEO and replaced with John Ray III, who formerly oversaw the dissolution of Enron. Even with his extensive experience with winding down high-profile distressed companies, Ray publicly criticized FTX and Bankman-Fried in the bankruptcy filings, stating: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
The U.S. Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission have separately leveled charges against Bankman-Fried, and authorities have indicated that more arrests are coming. Unsealed Dec. 13, the DOJ indictment accuses “SBF” of conspiring to defraud FTX customers by misappropriating their deposits to pay debts and expenses of Alameda, among other grievances.
The SEC also charges that Bankman-Fried misled equity investors who pumped more than $1.8 billion into his company, and the CFTC alleges that he committed fraud and made material misrepresentations tied to the sale of digital commodities in interstate commerce.
BlockFi
The contagion from the fall of FTX spread in mid-November to crypto lender BlockFi. In a move out of Celsius and Voyager’s playbook, the company began by freezing withdrawals on Nov. 10, which was quickly followed by a Chapter 11 bankruptcy filing on Nov. 28.
Before its collapse, BlockFi had signed a deal with FTX and Bankman-Fried, giving the latter the option to purchase BlockFi for $240 million along with extending it a $400 million revolver loan. With FTX’s collapse, BlockFi suddenly found itself strapped for liquidity and unable to meet its obligations.
In its bankruptcy filings, BlockFi outlined significant exposure to FTX, with an outstanding loan of $275 million owed to FTX.US, and noted that it had over 100,000 creditors. The company also held customer assets on the FTX platform that were now inaccessible, in addition to being owed amounts from Alameda.
[Read: How to Invest in Cryptocurrency.]
Experts’ Take on the Future of Crypto
Despite the recent events, many prominent figures in the industry remain bullish on the prognosis for overall crypto adoption but are now echoing calls for regulation. For many of these experts, the current events represent a speed bump in the overall path for widespread crypto acceptance.
“While recent market events have been a serious, short-term setback for the industry, the digital asset ecosystem will emerge with an intense focus on the integrity of assets and actors alike,” says Diogo Mónica, co-founder and president of Anchorage Digital. Mónica believes the heightened scrutiny will be a net positive for crypto in the long run.
“The path forward for the industry and regulators alike lies in applying time-tested standards from traditional finance to the digital asset ecosystem,” he says. “These include checks and balances like a distinction between custodial and exchange platforms, as well as segregation of customer and firm funds.”
Richard Gardner, CEO of Modulus Global, agrees, noting: “In order to stop those who would follow in the steps of Sam Bankman-Fried, regulators need to quickly secure the industry. This should include a prohibition on the comingling of client and exchange assets.”
Underscoring these regulatory reform initiatives is the need to build trust and confidence in the crypto industry by focusing on effective self-regulation. Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, says that “the crypto industry needs to take action to reflect and consider recent failures as a turning point, and openly and transparently communicate this to customers, legislators and regulators.”
A notable feature of the collapses enumerated above was contagion between crypto organizations. Chris Kline, chief revenue officer and co-founder of Bitcoin IRA, says that “most entities within the crypto space are connected and intertwined, so there’s a sort of cascading domino effect that takes place when an entity implodes.”
Kline believes that the fall of exchanges and lenders demonstrates that they are not a long-term solution for most crypto holders. Instead, he argues that regulated and transparent custodial solutions should be the end goal for true institutional and retail adoption of crypto.
The bear case on crypto. Some experts remain bearish altogether on crypto’s overall long-term prospects. Robert Johnson, professor of finance at Creighton University, criticizes the overall utility of crypto, believing it ultimately to be “a solution in search of a problem.”
Johnson questions the actual societal need for crypto. He points out that despite numerous high-profile collapses, the regular financial system has remained relatively unaffected by crypto failures, whereas in 2008 the fall of a few traditional banks proved much graver and required government intervention.
Still, Johnson says that while he is obviously not a fan of crypto, he wouldn’t bet against it in the short term either. He cites economist John Maynard Keynes, who famously remarked that “markets can remain irrational longer than you can remain solvent.”
“I am convinced of the ultimate demise of crypto, but don’t believe that it is necessarily imminent,” says Johnson. “There is almost a cult-like fervor for many crypto speculators, and the recent events may have, in fact, stiffened their resolve.”
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Will Crypto Recover? A Recap of 5 Implosions in 2022 originally appeared on usnews.com
Correction 12/14/22: A previous version of this story misstated Chris Kline’s position at Bitcoin IRA.
