Not Just FTX! How Many Other Crypto Firms Acted Like Banks, Then Collapsed Like Dominoes

Amid the bloodbath in crypto prices last year, along with the Terra Luna crash, the FTX fiasco went on to add more pain for the already struggling industry.

But that¡¯s not all. There have been numerous other crypto firms that have collapsed in recent months and filed for bankruptcy, including Genesis, BlockFi, Three Arrows Capital, Voyager Digital and Celsius Network.

So how and why did so many crypto firms fall one after another? Read on as we explain the same.

Acted Like Banks, Fell Like Dominoes

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Among all these crypto firms that have collapsed recently, one thing seems to be common- they attempted to act as the cryptocurrency equivalent of a bank, promising lucrative returns to customers who deposited their bitcoin or other digital assets.

In a span of less than a year, nearly all of those crypto firms have failed spectacularly. Indeed, they acted like banks, and then collapsed like dominoes.

Its a no-brainer that the crypto industry grew into trillions of dollars as cryptocurrency enthusiasts were looking to build their own parallel world in finance, untethered to traditional banking and government-issued currencies.

But due to the lack of safeguards and a government backstop, these crypto firms failed in domino-like fashion. What started with one crypto company collapsing in May spilled over onto one crypto lending firm and then the next, as per The Associated Press (AP) report.

All these crypto lending companies were perhaps trying to do what banks do traditionally: Take in crypto deposits, give depositors a dividend on their stored crypto, and then make loans to earn a profit. That is what the banking industry has done for hundreds of years, but with government-sanctioned currencies, of course.

Moreover, even government regulators started clamping down on crypto lending companies' ability to advertise their services at a large scale, mentioning that their products should have been regulated by securities regulators.

Its fair to say that the back to back collapse of so many crypto firms reminds of the 2008 financial crisis, though on a relatively smaller scale. While there are currently no worries that the collapse of these crypto firms will impact the broader economy, urgent steps are indeed needed to regulate crypto industry globally.

Also Read: Mystery Of Terra Luna Crash Deepens After FTX Collapse

Biggest Drawback For Crypto Lending

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The biggest drawback for crypto lending amidst this collapse, is the lack of safeguards. There is no deposit insurance, government stopgap, or even a privately run entity to protect depositors if their crypto firm were to fail. As per the report, this was still fine when crypto prices were moving higher because the collateral banks were accepting in exchange for the loans was increasing in value. Demand for crypto deposits was so high, firms were willing to pay a yield of 10% of more on depositors' crypto holdings.

But then crypto prices started falling and bled heavily last year. As a result, much of the underlying collateral that these firms were holding became worthless than the loans they had issued, thus effectively making several "crypto banks" insolvent. The first two crypto lending firms to collapse were reportedly Celsius and Voyager Digital. The companies had been exposed to both falling crypto prices as well as risky loans made to crypto hedge funds like Three Arrows Capital, which was forced to liquidate and go out of business in June.

BlockFi, another crypto lender, turned to then-crypto giant FTX and its founder Sam Bankman-Fried for a rescue. Bankman-Fried gave BlockFi a financial lifeline, one of several moves that earned Bankman-Fried the tag of a 'savior' or financial backstop for the crypto industry.

But FTX's own bankruptcy in November is what jolted the crypto world even more, caused by high-risk lending to its affiliated hedge fund Alameda Research, caused BlockFi's financial lifeline to wither away. BlockFi's own bankruptcy became an inevitability. In a show of how intertwined these crypto lenders became, Genesis made billions in loans to Alameda. As a result, saddled with bad loans, many of these high-tech firms experienced a very old phenomenon: depositors wanted their money back, and a bank run started.

Also Read: 22-YO Shubham Saini's Tea Stall Accepts Crypto Payments

What's Next For Crypto?

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Thousands of customers at these collapsed crypto lending firms are still waiting to see if their assets can be recovered or found in bankruptcy court, which is expected to take months or even years perhaps. However, FTX did reveal earlier this month that it has recovered $7.3billion (?5.8billion) of customer funds and could be restarted as soon as next year. Similarly, other crypto firms' investors can be hopeful of their recovery too.

Also, crypto regulation has been a hot topic at many of world leaders¡¯ economic conferences in recent months, which can be seen as a hope that at least a minimum level of safeguards would be provided to depositors or investors.

Also Read: Former FTX CEO May Face Jail For Upto 115 Years

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