It has been another bad week for the cryptocurrency market.
On Sunday, the crypto lending and trading platform Celsius Network announced that it would pause all withdrawals and transfers. Coinbase, another cryptocurrency trading platform, also laid off 18% of its workforce on Tuesday and warned of a prolonged “winter of cryptography.” And on Saturday, the price of Bitcoin fell below $ 20,000 for the first time since 2020.
The fall began last month, when the US Federal Reserve announced its intention to raise interest rates to fight inflation, prompting investors to sell risky assets such as cryptocurrencies. But it is not the only factor that explains the recent collapse of the cryptographic market.
Many crypto trading platforms offered decentralized financial products, also known as DeFi. DeFi allows users to borrow, trade and earn interest on cryptocurrency holdings, similar to a bank.
“The DeFi ecosystem aims to provide a parallel financial system to the traditional financial system. It is effectively an effort to replicate the traditional functions of the financial system through open source global decentralized blockchains,” said Ryan Clements, an associate professor at the Faculty of the University of Calgary. of Law, he told CTVNews.ca during a video interview on Saturday.
But the DeFi ecosystem is often based on algorithmic stable currencies, which are cryptocurrencies that try to set their value at a steady pace by using computer calculations that control their supply, offering investors a supposedly stable alternative to volatile cryptocurrencies. with Bitcoin.
But in May, the value of TerraUSD, a popular stable currency, fell from about a dollar to less than 10 cents. As of June 18, this cryptocurrency is worth less than a penny.
“This failed in a catastrophic way and had a cascading effect on the larger crypto market, which accelerated sales pressure,” Clements said.
Some of these cryptographic exchanges, such as Celsius, operated with a split-reserve system just like a bank, where it would lend the cryptographic assets it receives as deposits. But as sales pressure intensified, Celsius stopped withdrawals and transfers.
“There was an execution of Celsius as a cryptocurrency bank and Celsius had to freeze all withdrawals because it could not meet the demands of depositors,” Clements explained.
While cryptographic exchange platforms may offer services similar to those offered by a bank, Clements points out that there are far fewer protections. Unlike bank deposits, which are insured by the Canadian Deposit Insurance Corporation, cryptocurrencies have no insurance, which means that all of your assets could disappear if your cryptocurrency platform is closed.
This is what happened in 2019, when the cryptographic exchange Quadriga, based in BC, closed. Its customers collectively lost at least $ 169 million.
REQUESTS BETTER CRYPTO RULES
Experts say the stagnation in the crypto market is underscoring the need for stronger consumer protection in the industry to protect Canadians.
“This is an area that is still small, but growing very fast. And it is largely unregulated,” Carolyn Rogers, the Bank of Canada’s senior deputy governor, told Reuters on Thursday. “We don’t want to wait until it gets much bigger before we put regulatory controls in place.”
In February, Conservative MP Michelle Rempel Garner introduced a private member bill in the House of Commons calling on the finance minister to develop a national regulatory framework for cryptocurrency.
“The market instability we are seeing today further emphasizes the need to talk about how to protect people and provide regulatory stability for the growth of the cryptocurrency sector,” Rempel Garner said in a statement last month, when cryptocurrencies began to fall.
But Clements says the current paper regulations are actually “quite robust.”
“We have rules for virtual currency distributors to be money services companies and to register with FINTRAC and be subject to reporting requirements related to the fight against money laundering and anti-terrorist financing,” he said. to say.
Several crypto exchange platforms are already registered and regulated by securities managers. These platforms are subject to risk disclosure, which requires that they be transparent about who their borrowers are, how deposits are maintained, how many capital reserves they have, and what types of safeguards are being implemented.
However, due to the global reach of the Internet, many platforms used by Canadians are based outside of Canada and do not comply with these regulations.
“The biggest challenge in this area … is actually the application, because there are a lot of loan intermediaries that have come up in recent years that Canadian platforms can access,” Clements said. “These loan intermediaries do not comply.”
Celsius is not registered with any provincial securities regulator in Canada, despite receiving a $ 400 million investment from the Quebec Pension Fund. It had also promised its customers a high return on their deposits, up to 18.6 per cent a year. At the same time, it also offered loans for only 0.1% annual interest.
Clements says charging high interest rates on deposits while offering low-interest loans is “the opposite of what a bank does.”
And so there are a lot of people, myself included, who have long been skeptical about how these returns are generated, what risks these lenders take, “he said.
Reuters reported on Thursday that in the US, regulators in five states have announced that they are opening investigations into Celsius. Celsius told customers on Wednesday that it was “trying to stabilize our liquidity and operations.”
WHAT CRYPTO INVESTORS SHOULD KNOW
Experts agree that anyone who chooses to jump into the cryptocurrency market must understand the high-risk nature of these investments.
“Like any asset that is jumping in price, people see an opportunity for quick gains,” Rogers said. “Our concern is that they may not understand the risks. They may not even understand that it is not a regulated area.”
This risk factor also applies to algorithmically stable currencies, as evidenced by the fall of TerraUSD.
“You have to be prepared for volatility, like all risky assets, and you have to be very careful when the promoters of certain acidic cryptocurrency assets make claims about their stability or make claims about their guaranteed returns,” Clements said.
With Reuters files.