Crypto Lending Firms Hit Worst As FTX Crises Spreads

The collapse of the FTX exchange may have been the worst sting ever for the crypto industry since it continues to cause more crypto companies to collapse. The latest victim is Genesis Global, which filed for bankruptcy under Chapter 11 of the US bankruptcy act.

Genesis, which was FTX’s biggest unsecured lender, joins BlockFi, Celcius Network, and Voyager Digital, which have gone under as a result of recent financial problems in the crypto industry. FTX had won the bid to acquire Voyager when it went into bankruptcy last year.

Quite several other companies that had exposure to FTX have reported operational problems, sometimes going as far as pausing withdrawals on specific cryptocurrencies and others seeking financial rescue plans.

It will also certainly take some time to recover for those that will recover from the crisis. And the effect seems global, with more yet to come to light about which other companies may be affected. This week, a Brisbane-based cryptocurrency exchange Digital Surge, which had $33 million on FTX when the latter collapsed, has been bailed out and will refund customers their money and return to operation. The approval of the recovery plan by creditors comes after a long battle with over 20,000 customers since the exchange decided to pause withdrawals in November following the collapse of FTX. Other companies that had exposure to FTX include Gemini, Coinshares, Genesis, and Galaxy Digital. 

BlockFi, on its part, could not recover. It filed for bankruptcy in November last year, two weeks after the collapse of FTX. The company had an outstanding loan of $275 million to FTX when it filed for bankruptcy. Some documents have surfaced this week, revealing that the company had over $1.2 billion in loans and assets tied up with FTX and Alameda Research.

Investigation into crypto lending firms that have been bankrupt due to others collapsing reveals complex inter-firm linkages. In most cases, problems arise due to how the companies had structured their products. Many of them combine interest-paying savings products with lending products, which is not a problem. However, those with interest-paying savings products promise high APYs to customers because they need deposits. They then loan out these deposits to other firms to get high interest, but problems arise when and if their debtors fail. Besides, most lend out customer deposits without their express approval, and hence problems arise when funds aren’t available for withdrawal by the originating customers during a market panic.

Celcius Network and Voyager Digital went into bankruptcy after the collapse of yet another firm, Three Arrows Capital, that owed them. Three Arrows Capital had also loaned TerraUSD algorithmic stablecoin collapsed in May 2022. TerraUSD also collapsed in connection to Anchor Protocol which operated on the Terra blockchain. It paid high interest to depositors and, in turn, loaned out these deposits to other companies.

Celcius Network, which filed for bankruptcy in July 2022, suffered problems following the collapse of TerraUSD and Luna. It was then ordered by the court to reimburse customer funds. The company has now proposed to issue a bankruptcy crypto token to creditors who meet a certain threshold and reimburse funds to others in a bid to reorganize and reemerge as a publicly traded company. Those plans will go on in a month, it said, if regulators approve it. The Terra and Luna crisis involved around $60 billion in customer and creditor funds, but FTX’s crisis could even be worse. 

Many crypto lending companies also lend to customers who offer much less collateral. Those having collaterals for the loans have also seen the value decrease heftily following the recent crash in crypto prices. They are unable to recover at times of high negative volatility, as seen in crypto markets.

Thus the under-collateralization of such loans only makes things worse during crypto price crashes. Most companies then rush to more creditors to save the situation until market prices are unable to recover and to their downfall. Nonetheless, a few of them are known for market malpractices such as overvaluation of their assets when seeking help from creditors and lack of transparency. Instead of designing suitable products, the majority have been trying to act like legacy banks, all without regulatory and insurance backing.