It’s been another bad week for the cryptocurrency market.
On Sunday, cryptocurrency lending and trading platform Celsius Network announced that it would be suspending all withdrawals and transfers. Coinbase, another cryptocurrency trading platform, also laid off 18% of its workforce on Tuesday and warned of a protracted “crypto winter”. And on Saturday, Bitcoin’s price dropped below $ 20,000 for the first time since 2020.
This collapse began last month when the US Federal Reserve signaled its intention to raise interest rates to fight inflation, prompting investors to sell risky assets such as cryptocurrencies. But that’s not the only factor behind the recent cryptocurrency market crash.
Many crypto-trading platforms offered decentralized financial products, also known as DeFi. DeFi allows users to borrow, trade and earn interest on cryptocurrency holdings, such as a bank.
“The DeFi ecosystem claims to provide a financial system parallel to the traditional financial system. It’s actually an effort to replicate the traditional functions of the financial system using open source global decentralized blockchains, “said Ryan Clements, an associate professor at the University of Calgary faculty of Law, told CTVNews.ca in a video interview Saturday. .
But the DeFi ecosystem often relies on algorithmic stablecoins, which are cryptocurrencies that attempt to fix their value at a constant rate through the use of computer calculations that control their supply, providing investors with a supposedly stable alternative to volatile cryptocurrencies. like Bitcoin.
But in May, the value of TerraUSD, a popular stablecoin, dropped from around $ 1 to less than 10 cents. Since June 18, this cryptocurrency is worth less than a cent.
“It failed catastrophically and had a cascading effect on the broader cryptocurrency market, which accelerated the selling pressure,” Clements said.
Some of these cryptocurrency exchanges, such as Celsius, operated on a fractional reserve system, much like a bank, where it lent cryptocurrencies which it received as deposits. But as selling pressure intensified, Celsius stopped withdrawals and transfers.
“There was a rush to Celsius as a cryptocurrency bank and Celsius had to block all withdrawals because they couldn’t meet depositor demands,” Clements explained.
While cryptocurrency exchanges 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 Canada Deposit Insurance Corporation, crypto deposits are not insured, meaning that all of your assets could disappear if your crypto platform fails.
That’s what happened in 2019, when BC-based cryptocurrency exchange Quadriga closed down. His clients have collectively lost at least $ 169 million.
ASK FOR BETTER CRYPTOGRAPHY REGULATION
Experts say the collapse of the cryptocurrency market underscores the need for better consumer protection in the industry to protect Canadians.
“It is still a small field, but it is growing rapidly. And it’s largely unregulated, “Carolyn Rogers, senior vice governor of the Bank of Canada, told Reuters.” We don’t want to wait for it to get much bigger before we put in regulatory controls. “
Last February, Conservative MP Michelle Rempel Garner presented a private member’s bill to the House of Commons asking the Minister of Finance to develop a national regulatory framework for cryptocurrency.
“The market instability we see today further underscores the need to talk about both personal protection and regulatory stability for the growth of the cryptocurrency industry,” Rempel Garner said in a statement last month as cryptocurrencies began to trade. collapse.
But Clements says the current paper regulations are actually “solid enough”.
“We have rules regarding virtual currency brokers who are money services businesses and must register with FINTRAC and be subject to AML and AFC reporting requirements. Terrorism,” he said.
Several cryptocurrency exchange platforms are already registered and regulated by securities administrators. These platforms are subject to risk information, which requires them to be transparent about who their borrowers are, how deposits are held, how many capital buffers they have and what types of collateral are implemented.
However, due to the global reach of the internet, many platforms used by Canadians are based outside of Canada and do not adhere to these regulations.
“The biggest challenge in this area … is actually application, because there are a lot of loan brokers that have sprung up in the last few years that are accessible through Canadian platforms,” Clements said. “These loan brokers are not compliant. “
Celsius is not registered with any provincial securities regulator in Canada, despite receiving a $ 400 million investment from the Quebec pension fund. He had also promised his clients huge returns on their deposits, up to 18.6% per year. At the same time, it also offered loans as low as 0.1% interest per year.
Clements says that charging deposits with a high interest rate by 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 run, “he said.
On Thursday, Reuters reported that regulators in five states in the United States announced the opening of investigations into Celsius. Celsius told clients Wednesday that he was “trying to stabilize our liquidity and our operations.”
WHAT CRYPTO INVESTORS NEED TO KNOW
Experts agree that anyone who chooses to enter the cryptocurrency market should understand the high-risk nature of these investments.
“Like any asset that rises in price, people see an opportunity for quick earnings,” Rogers said. “Our concern is that they don’t understand the risks. They may not even understand that this is not a restricted area. “
This risk factor also applies to algorithmic stablecoins, as demonstrated by the TerraUSD crash.
“You have to be prepared for volatility, like all risky assets, and you have to be very careful when promoters of certain immature crypto assets make claims about their stability or guaranteed returns,” Clements.
With Reuters files.