According to a research report from the Federal Reserve Bank of Chicago, big investors were the driving force behind 2022 actions on crypto businesses like Celsius and others.
A recent study by the Federal Reserve Bank of Chicago indicates that the dramatic runs on cryptocurrency platforms experienced in 2022 were primarily driven by high-profile investors, including institutional clients.
This finding sheds light on the dynamics of the cryptocurrency market and the behavior of savvy customers in times of crisis. The study explicitly highlights the case of Celsius Network, a major lending platform that faced significant withdrawal pressure before finally filing for bankruptcy.
According to research by the Federal Reserve Bank of Chicago a report35% of all withdrawals from the Celsius network in June 2022, just before its collapse, were made by account holders with balances exceeding $1 million.
These high net worth individuals showed a sense of urgency by withdrawing their money faster than other account holders and withdrawing a larger percentage of their total investment.
Inadequate planning and complacency
The study further criticizes crypto platforms, including Celsius Network, BlockFi, Genesis Global Capital LLC, Voyager Digital and Sam Bankman-Fried’s infamous FTX, for their inadequate planning and failure to anticipate potential rush of withdrawals.
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The agency analyzed several bankruptcy files to understand the outflows of client funds from these platforms and concluded that their preparedness for such scenarios was insufficient.
The researchers note that the collapse of the tera ecosystem, FTX and Do Kwon, in particular, revealed significant flaws in risk management and withdrawal processes.
With the collapse of these platforms, hundreds of thousands of retail investors have found themselves in a state of uncertainty and loss. The researchers, Radhika Patel, research assistant at the Federal Reserve Bank of Chicago, and Jonathan Rose, historian of the Federal Reserve System, argue that these events constituted a classic financial crisis in a new digital environment.
This new landscape has raised pressing political concerns and highlighted the need for regulatory oversight to protect investors.
In an interview, Jonathan Rose emphasized the unique characteristics of cryptocurrency banking operations compared to traditional banking operations. He noted that actual bank inflows, such as the recent collapse of Silicon Valley Bank (SVB) and others, could happen faster than their cryptocurrency counterparts.
This disparity is primarily due to depositor profiles and the technological processes involved in withdrawals. Rose referred to recent conventional bank runs as the largest and fastest the world has ever seen.
Cryptocurrency markets are on the way to recovery
After the turbulent events in 2022, cryptocurrency markets are showing signs of recovery in 2023. However, the trend is still bearish as regulatory pressures intensify. Despite a brief surge in April, when bitcoin (BTC) price reached a high of $31,000, the total market capitalization has remained relatively flat over the past two months, currently standing at $1.169 trillion, according to data from Koenjiko.
Despite this, the markets have regained 44% of their value since hitting a down cycle low of $820 billion in November 2022.
As the crypto markets continue to recover, regulatory scrutiny remains a major challenge that investors and platforms must navigate to ensure the industry’s stability and growth.