NEW YORK (AP) – The price of bitcoin and other cryptocurrencies plummeted on Monday after a major cryptocurrency lender effectively failed and disrupted all withdrawals from its platform, citing “extreme market conditions.”
It is the latest high-profile collapse of a pillar of the cryptocurrency industry. These collapses have wiped out tens of billions of dollars of investor assets and sparked urgent calls to regulate the freewheeling industry.
Bitcoin was trading at about $ 22,400 on Monday afternoon, down more than 16% last day. Ethereum, another popular cryptocurrency, fell by about 17%. Investors have been selling riskier assets, such as digital currencies and technology stocks, as the Federal Reserve raises interest rates to combat high inflation.
On Sunday, the cryptocurrency lending platform Celsius Network announced that it was pausing all withdrawals and transfers between accounts to “honor, over time, withdrawal obligations.” Celsius, with approximately 1.7 million customers and more than $ 10 billion in assets, gave no indication in its announcement when it would allow users to access its funds.
In return for customer deposits, the company pays extremely generous returns, in excess of 19% on some accounts. Celsius takes these deposits and lends them to generate a return.
Lending platforms like Celsius have recently been scrutinized for offering returns that normal markets could not support, and critics have effectively called them Ponzi schemes.
Francisco Orduna, 36, said he was referred to Celsius about a year ago and was attracted to the company’s high-performing promises in its cryptocurrency holdings.
“It was easy to overlook the risk because users got used to these weekly Celsius interest payments,” Orduna said. He took most of his money out of Celsius late last week, but said he still had residual property trapped on the platform.
It is the second notable collapse of the cryptocurrency universe in less than two months. The stable Earth currency imploded in early May, wiping out tens of billions of dollars in a matter of hours. Stable currencies have been shown to be relatively safe because they are supposed to be backed by hard assets, such as a coin or gold.
Like Earth, Celsius had been sold as a safe place for cryptocurrency holders to deposit their funds. Even while Celsius was failing, the company’s website announced that users could “access your coins whenever you want, keep them safe forever.”
“There is a lot of work ahead, as we consider several options, this process will take time and there may be delays,” Celsius said in a statement.
The move surprised investors and depositors. In online chats, they asked why their investments were not protected.
Orduna said he withdrew his money from Celsius in part because of the implosion of Earth. There have been reports that Celsius had invested some of its users ‘funds in Earth, and was concerned that Celsius was taking too high a risk with depositors’ funds.
“I started to worry if the performance they were offering was really sustainable,” he said.
It is unclear whether Celsius depositors will recover all of their funds. A cryptocurrency lender is not regulated like a bank, so there is no deposit insurance or legal framework for anyone to get their money back first, as in a bankruptcy. Celsius investors, including the Quebec Pension Fund and the prominent WestCap venture capital fund, may be able to recoup their investment before Celsius depositors do.
WestCap did not respond to a request for comment. The Board of Pensions of Canada also did not respond to a request for comment.
“This was another banking career. You’re not reinventing anything here. They were promoting their services as a better savings account, but in the end, you’re just another unsecured lender,” said Cory Klippsten, CEO of Swan. Bitcoin, which has been publicly skeptical about Celsius’ business model for years.
Terra, and its symbol Luna, offered similar returns to customer deposits. These tokens collapsed after large customer withdrawals forced Terra’s operators to liquidate all assets used to support their currencies. The collapse of Terra has spurred calls for reform in the cryptocurrency industry and calls for congressional regulation.