Crypto Bank Suddenly Halts Withdrawals, Will Others Follow Suit?

What Happened

Crypto-lender Celsius announced Sunday evening a suspension of withdrawals and transfers as a result of ongoing market turbulence, in what has the bearings of a bank run on its assets as well as the firms’ response to safeguard remaining assets. Meanwhile, crypto exchange Binance aggravated market sentiment by announcing that it had “temporarily paused” certain Bitcoin
BTC
withdrawals as well. Furthermore, it appears that withdrawals in Ether
ETH
eum and major stablecoin USDC
USDC
are also partially impacted. However, it is unconfirmed whether those disruptions are being caused by the current market panic.

Although intermittent issues can happen, the timing of these announcements caused fear among investors that other major players could follow suit, making it difficult for users to recover their tokens. Through its status pages, Coinbase
COIN
(NYSE: COIN) did not report any chain issues, but Kraken reported Tron (TRX
TRX
) delays which it’s investigating. In a response to a Forbes query this morning, FTX and Gemini indicated that they were not currently or had plans to curtail any functionality while eToro replied that “it’s business as usual here at eToro.” BlockFi, a quasi-crypto bank with a similar business model to Celsius, announced via its CEO Zac Prince on Twitter that all of its services and systems remain operational.

Key Background

Even the largest and most reputable cryptocurrency exchanges in the world have notoriously gone down during times of market stress. Coinbase has often been the poster child for these crashes, which leaves customers frustrated and has even led to lawsuits against firms to try and recoup losses for failed trades and transactions in the past. “Data provider Nomics indicates that bitcoin’s hourly trading volume rose to $4 to $9 billion on Monday compared to an average of $1billion to $3 billion in the past week.

The situation was not helped by Coinbase announcing in its recent quarterly earnings, where it reported a massive $430 million loss, that customer funds could be seized in the event of a bankruptcy. Adding to investor angst is the fact that another major stablecoin, USDD, which is a carbon copy of the failed TerraUSD
UST
, lost its peg today against the dollar, raising additional fears of market contagion.

Other relevant context is that companies such as Celsius and BlockFi have faced the ire of securities regulators in recent months, who claim that their interest-bearing accounts are tantamount to a securities offering, for which they are not registered. BlockFi settled with the SEC and a handful of state regulators for $100 million in February 2022.

Finally, it is also worth noting that although Celsius has long been plagued by allegations of financial risk, its announcement of the suspension was diametrically opposed to commentary coming out of the company as recently as late week.

Key Quote

The company’s strong liquidity framework, established practices around liquidity data, and modeling were elements that I was happy to find similar to other large financial institutions. This put us in a strong position to weather the recent market turbulence and ensure that clients who needed to access their digital assets could get them free and clear – CFO Rod Bolger on June 8.

Key Figure

Bitcoin price today is trading 67% below its all time high of $68,530 set on Nov 8, 2021

Outlook

While it may appear that other major platforms are largely maintaining their operational status, service interruptions could increase if market panic deepens. This is especially true for assets being directly impacted by today’s events. Moving forward, there is also a chance that layoffs or hiring freezes announced by companies such as Coinbase, Crypto.com, BlockFi, Gemini, and more could impact future uptime during periods of high stress.

Investors would be wise to track the status of their providers for any changes.