Another bad week has passed 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 crypto trading platform, also laid off 18% of its workforce on Tuesday, warning of an extended “crypto winter”. And on Saturday, the price of bitcoin fell below $ 20,000 for the first time since 2020.
The crash began last month after the US Federal Reserve signaled its intention to raise interest rates to fight inflation, prompting investors to sell off risky assets such as cryptocurrencies. But this is not the only factor that explains the recent collapse of the crypto market.
Many crypto trading platforms have offered decentralized financial products, also known as DeFi. DeFi allows consumers to borrow, trade and earn interest on cryptocurrencies, like a bank.
“The DeFi ecosystem aims to provide a parallel financial system to the traditional financial system. It is an effective effort to replicate the traditional functions of the financial system through the use of global decentralized open source blockchains, “Ryan Clements, an associate professor at the University of Calgary Law School, told CTVNews.ca in a video interview Saturday.
But the DeFi ecosystem often relies on algorithmic stable coins, which are cryptocurrencies that try to fix their value at a constant rate by using computer calculations that control their supply, offering investors a supposedly stable alternative to unstable cryptocurrencies such as bitcoin.
But in May, the value of TerraUSD, a popular stable coin, fell from about $ 1 to less than 10 cents. As of June 18, this cryptocurrency costs less than a penny.
“It failed miserably and had a cascading effect on the larger crypto market, which accelerated sales pressure,” Clements said.
Some of these cryptocurrencies, such as Celsius, operated on a partial reserve system, just like a bank, where it would lend crypto assets that it receives as deposits. But as the pressure on sales intensified, Celsius stopped withdrawals and transfers.
“He was dealing with Celsius as a crypto bank and Celsius had to freeze all withdrawals because it could not meet the depositor’s requirements,” Clements explained.
While cryptocurrency exchange platforms may offer services similar to those offered by a bank, Clements notes that there are far fewer protections. Unlike bank deposits, which are insured by Canadian Deposit Insurance Corporation, crypto deposits do not have insurance, which means that all your assets may disappear if your crypto platform is shut down.
This happened in 2019, when the British Columbia-based crypto exchange Quadriga closed. His clients lost a total of at least $ 169 million.
CALLS FOR BETTER CRYPTO REGULATION
Experts say the collapse of the crypto market underscores the need for stronger consumer protection in the sector to protect Canadians.
“This is an area that is still small but growing very fast. And it is largely unregulated,” Carolyn Rodgers, senior deputy governor of the Bank of Canada, told Reuters on Thursday. “We don’t want to wait until it gets much bigger before introducing regulatory control.”
As early as February, Conservative MP Michel Rempel Garner introduced a bill to a private member of the House of Commons, calling on the finance minister to develop a national regulatory framework for cryptocurrency.
“The market instability we are witnessing today further underscores the need to talk about how to protect people and ensure regulatory stability for growth in the crypto asset sector,” Rempel Garner said in a statement last month as crypto assets began to decline.
But Clements says the current provisions on paper are in fact “quite stable.”
“We have rules for virtual currency dealers who are money service companies and must register with FINTRAC and be subject to reporting requirements related to the fight against money laundering and terrorist financing,” he said.
Several cryptocurrency exchange platforms have already been registered and regulated by securities administrators. These platforms are subject to risk disclosure, which requires them to be transparent about who their borrowers are, how deposits are held, how much capital reserves they have, and what types of safeguards are in place.
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 implementation, because there are a whole bunch of lending intermediaries that have emerged in the last few years that are available from Canadian platforms,” Clements said. “These credit intermediaries do not comply.”
Celsius is not registered with any provincial securities regulator in Canada, despite the fact that it received an investment of $ 400 million from the pension fund in Quebec. He also promised his customers a huge return on their deposits, up to 18.6% per annum. At the same time, it offered loans for less than 0.1% interest per year.
Clements says charging high-interest deposits while offering low-interest loans is “the opposite of what the bank does.”
So, there are many people, including me, who have long been skeptical about how this return is generated, what risks these creditors take, “he said.
Reuters reported on Thursday that U.S. regulators in five states have announced they are launching investigations into Celsius. Celsius told its 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 jumps in price, people see opportunities for quick profits,” Rodgers said. “Our concern is that they may not understand the risks. They may not even understand that this is not a regulated area.”
This risk factor also applies to algorithmically stable coins, as demonstrated by the collapse of TerraUSD.
“You have to be prepared for instability, like all risky assets, and you have to be very careful when promoters of certain acidic crypto assets claim their stability or claim their guaranteed income,” Clements said.
With files from Reuters.
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