In the crypto industry in 2022, the phrase “halting withdrawals” is like black smoke billowing out of a building. Damage is certain.
Technically it means that a crypto exchange or lender has gated customers from being able to get their money or digital tokens back – typically because there’s just not enough assets on hand to meet redemption requests. The likely upshot, though, is that the business is unlikely to recover easily from the destruction. In many cases, a bankruptcy filing is the next step.
Now, the rapid unraveling of once-billionaire Sam Bankman-Fried’s crypto empire, including the FTX exchange and the crypto trading firm Alameda Research, has unleashed a fresh wave of crypto exchanges and lenders halting customers’ withdrawals over the past few weeks.
The collateral damage lengthens a list of casualties from the dramatic collapse of the Terra blockchain earlier this year, which accelerated or led directly to the failures of crypto firms including Celsius Network, Babel Finance, Voyager Digital and Three Arrows Capital.
The contagion can spread swiftly. When one company suddenly refuses redemption requests, another company suddenly faces a liquidity crisis. Market jitters unnerve investors, leading to further withdrawal requests, exacerbating the panic. Such is the pattern in digital-asset markets where there is no Federal Reserve or other central bank backstopping it all – as there is in the traditional financial system.
(CoinDesk counts 16 distinct withdrawal-halt announcements this year; the list is below.)
“For each player, you’re going to be in this situation where all of a sudden you have to manage how much information you want to reveal,” said Benoit Bosc, global head of product at crypto trading firm and liquidity provider GSR. “It might be more information than you actually want to reveal then.”
BlockFi, a crypto lender, paused client withdrawals from its platform on Nov. 10, citing the “lack of clarity” around FTX’s current situation; it was two days after the FTX exchange fully halted customer withdrawals…