The diminishing rate of promising crypto projects the previous year has been accused for causing the ongoing banking crisis in the US by the Federal Reserve Bank of Chicago (FRBC). In their latest report, the FRBC has said large withdrawals by institutional crypto investors stirred a liquidity crisis so severe that it left the traditional banking system in the US gasping for breath. Last month itself, three banks in the US shut their businesses due to lack of liquidity.
The gradual decline of BlockFi, Celcius, FTX, Genesis (in partnership with Gemini), and Voyeur Digital have been named as the most impactful crisis creators in FRBC’s report. The surprising collapse of Terra, that brought the crypto market to a standstill in May 2022, was the trigger point of severe ruckus for other players of the sector. Terra’s native stablecoin UST lost its equivalence to the US dollar that risked the finances of its holders. This had caused the crash of Terra. At the time Terra’s LUNA and UST tokens were said to have lost around $45 billion (roughly Rs. 3,70,004 crore) within three days. Several crypto firms dealed with it by laying off members of their staff just in order to keep their businesses afloat. At this point, crypto-related firms like Three Arrows Capital. Celsius, and Voyager were forced to file for bankruptcy after recording large outflows of funds.
“To draw customers, these platforms offered and marketed high-yield investment products with the ability to withdraw funds on demand. They used customers’ funds for illiquid and risky investments (e.g., in 3AC or the Anchor protocol) in attempts to generate the high returns promised to their customers. In response to negative shocks, customers had an incentive to run in order to avoid taking losses that would be borne by others,” a verified report added. Within the first two weeks last month, US saw about three large crypto-friendly banks crack under market pressure. Regulators who approved the closure of these banks said their unstable business status could have posed severe threat to the US economy. In the current scenario, the crypto market as well as the overall financial sector is undergoing a volatile change. Additionally, the consecutive interest rate hikes from the Fed in the US have added to the already high pressure on the financial market, including the crypto sector.