Bank runs are nothing new. Those frightening incidents when too many customers demand their money back at the same time have destroyed many financial institutions over the years.
Traditional banks largely solved that with deposit insurance, a guarantee from the Federal Deposit Insurance Corp. to make customers whole up to a certain amount if their bank fails.
With no such protection in crypto, the phrase “suspending withdrawals” has become a source of fear in 2022, a sign of deep trouble at firms that have tried to create a modern version of banking through digital assets. Customers who trusted the lender or exchange with their cryptocurrencies are suddenly unable to get the assets back.
Voyager's troubles came as crypto prices remained hugely depressed from their peaks. And it illustrates that when a crypto firm pauses withdrawals – warning the world of serious liquidity issues – it will have trouble restarting them outside of bankruptcy court.
“The problem is, once the withdrawal suspensions happen, it’s too late for the investors,” said Paul McCaffery, co-head of equities for Keefe, Bruyette & Woods.
When crypto lenders go broke
When crypto lenders go broke, the traditional financial regulatory system can’t help. The FDIC, which backstops deposits at conventional banks in the U.S., released a fact sheet on July 29 reminding the public of that.
No one can predict how far the domino effect of solvency issues will run, but it’s a safe bet crypto players will shudder if any other firms warn they are suspending withdrawals.
“The announcements are decelerating but not likely quite done yet as the fallout from the 3AC solvency continues to play out,” McCaffery wrote in an email to CoinDesk. “I am hopeful that all of this bloodshed will result in better risk management processes embedded in the business models going forward.”
Timeline of suspended withdrawals
June 17: Babel says that “redemptions and withdrawals from Babel Finance products will be temporarily suspended.”
June 23: CoinFLEX announces that it is “pausing all withdrawals.”
July 4: Vauld says that it “made the difficult decision to suspend all withdrawals, trading and deposits.”
July 20: Zipmex says that it is “pausing withdrawals until further notice.”
UPDATE (August 8, 2022, 01:48 UTC): Adds withdrawal announcement from Holdnaut.
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