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Explained: Why are crypto platforms suspending withdrawals and what are its implications?

In the blog post written by Vauld CEO Darshan Bathija — a BITS Pilani alumnus — the company said it has frozen its operations after users pulled nearly $200 million over the last three weeks that saw cryptocurrency prices plummeting.

Prices of cryptocurrencies had been falling in response to the US Federal Reserve raising policy interest rates to rein in the inflation, thereby draining out excess liquidity from the market. (File photo)

Singapore-headquartered cryptocurrency lending and trading platform Vauld suspended withdrawals, trading and deposits Monday because of volatile market conditions and financial difficulties, the company announced in a blog post. With this, Vauld joins major crypto broker Voyager Digital and crypto lender Celsius Network LLC to suspend trading and withdrawals.

Another crypto lending platform Babel Finance had also halted withdrawals.

Why has Vauld suspended withdrawals?

In the blog post written by Vauld CEO Darshan Bathija — a BITS Pilani alumnus — the company said it has frozen its operations after users pulled nearly $200 million over the last three weeks that saw cryptocurrency prices plummeting. Other platforms suspending withdrawals by users have cited facing “unusual liquidity pressures” as the reason behind preventing users from taking out their funds.

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What are the next steps for Vauld?

Vauld said it has hired financial and legal advisers to analyse options, including a potential restructuring. The company has engaged Kroll as financial adviser, and Cyril Amarchand Mangaldas and Rajah & Tann Singapore LLP as legal advisers in India and Singapore, respectively. Last July, the company raised $25 million led by Peter Thiel-founded Valar Ventures along with Pantera Capital and Coinbase.

Why are cryptocurrencies witnessing such a sharp decline?

Earlier, prices of cryptocurrencies had been falling in response to the US Federal Reserve raising policy interest rates to rein in the inflation, thereby draining out excess liquidity from the market. However, in May, two Stablecoins TerraUSD and its sister cryptocurrency Luna broke from their dollar peg and wiped out more than $40 billion of investor money. The selloff in TerraUSD rolled over to other major digital assets such as Bitcoin, which has lost more than 50% of its value since May.

Why is the announcement by Vauld and other crypto platforms over suspending trading significant?

The key aspect of this development is the liquidity crunch faced by these companies. Following the crash of TerraUSD and Luna, a Singapore-based hedge fund Three Arrows Capital (3AC) saw its assets under management plunge by over 70% given its heavy investments in Luna. As a result, 3AC defaulted on loans amounting to $670 million extended to it by Voyager Digital. This led to a spillover effect causing Voyager Digital to suspend trading, deposits and withdrawals. Similarly, another lender, Celsius Network, last month paused all withdrawals, swap and transfers between accounts for its 1.7 million customers. Notably, 3AC has filed for bankruptcy.

What is the big picture here?

The several cases of crypto lenders being brought down by the spiralling prices of digital assets point to cryptocurrencies being a heavily leveraged asset class. According to a Wall Street Journal report, 3AC, which is a big borrower in the system, saw its levered positions on some cryptocurrencies being liquidated by exchanges such as BitMEX and Deribit after failing to meet margin calls. The report also noted that given the uncertainty in the crypto market, some lenders have started recalling loans extended to large borrowers to check for their financial health.

“There is a shortage of supply as companies like Celsius have now turned off withdrawals and have a smaller amount of assets to lend out,” Adam Reeds, chief executive of the crypto lender Ledn, was quoted as saying by the Wall Street Journal. “Many market makers who used to borrow from platforms like that are now looking at alternatives,” Reeds said.

Are authorities stepping in?

The Monetary Authority of Singapore (where Vauld, 3AC, and TerraUSD creator Terraform Labs are based) is “carefully considering the introduction of additional consumer protection safeguards”, its Chairman Tharman Shanmugaratnam said, as per a Bloomberg report. The city-state is considering new rules such as placing limits on retail participation, and norms for use of leverage when transacting in cryptocurrencies. The report added that last week the Monetary Authority of Singapore reprimanded 3AC for providing false information and exceeding the limit on assets under management, and is continuing to investigate the fund for more rule breaches.

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First published on: 05-07-2022 at 12:25:15 pm
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