Massive InstitutionaAl Withdrawals Caused 2022 Crypto Bank Runs: FRBC Research

Research from the Federal Reserve Bank of Chicago (FRBC) suggested that the crypto bank crisis in 2022 was majorly spurred by massive institutional and retail withdrawals from the crypto industry. 

According to the study, the insufficient insurance for investors on crypto-related service providers’ platforms stirred panic among institutional and retail customers. Consequently, they chickened out and withdrew their funds heavily, causing a colossal liquidity crush on the platforms last year.

In addition, the collapse of these giant crypto platforms led to a chain reaction, causing massive fallout for many firms in the crypto industry. Studying the incidence, the FRBC has identified some factors that facilitated the strings of crisis that rocked the crypto space last year.

In the study, the agency stated that the bank run was mainly caused by a liquidity crisis on most crypto platforms. It highlighted that the liquidity crisis was facilitated by massive withdrawals of funds by some crypto whales, key institutional investors, and large portfolio holders on centralized platforms.

Study Recounted Major Crisis In 2022

Recounting the catastrophic events, the study pointed out that the collapse of Terraform Labs initiated the bank run. When Terra crashed, many investors with funds in crypto platforms associated with the troubled Terra started withdrawing them in massive numbers. 

Celsius and Voyager Digital, who had heavy investments in Terra, recorded a massive outflow, losing 20% and 14% of their customers, respectively, within 11 days after Terra collapsed. Celsius had reportedly invested about a billion US dollars in the failed Terra network.

Additionally, the study identified the Three Arrows Capital’s (3AC) collapse in July as the second major crisis in 2022. Voyager Digital and Celsius platforms, respectively, recorded another round of outflow of about 39% and 10% as they were heavily exposed to troubled 3AC.

Apart from those duo, many other crypto platforms incurred massive losses as they claimed to have lent out millions of dollars to 3AC before it went bankrupt. Consequently, 3AC was considered one of the major crypto platforms that caused the collapse of other dependent crypto firms in 2022. 

Statistics showed that 3AC borrowed $2.4 billion from Genesis Capital, $1 billion from BlockFi, $678 million from Voyager Digital, and $75 million from the Celsius exchange.

According to the study, FTX’s failure in November 2022 was the third major crisis that wreaked havoc in the crypto space last year. Before its eventual collapse, FTX had experienced a massive outflow of 37% of customers as news of an internal crisis caused panic among the public.

FTX exchange’s collapse raised massive concerns and doubts about the credibility of the crypto industry, as many investors lost their investments. In addition, Genesis lost 21% of its customers, while BlockFi lost 12% as they were both associated with the collapsed FTX.

Study Highlights Role Of Crypto Lending Platforms In Bank Runs

Taking a closer look at the three major crises, the study revealed that retail customers’ withdrawals were minute compared with institutional clients. In 2022, statistics showed that the Celsius platform received a $2 billion funding contribution from many institutional investors. 

In addition, big individual investors with over $500,000 in their accounts reportedly withdrew their funds at quicker rates than those with smaller accounts. For instance, accounts with more than $1 million makeup about 35% of the total withdrawals on the Celsius platform.

According to the study, withdrawals from crypto investors with large portfolios were not the underlying cause of the crisis. The risky investments of crypto lending companies that offer high returns were the primary cause of the problem, as per the FRBC study.

In addition, the research highlighted that the crypto lending firms have a different system from the traditional bank lending system. Unlike the bank’s lending protocol, crypto lending firms offer no insurance or security against platform failures. Consequently, this stirs panic among investors, causing a massive downfall in the global crypto market.

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