How Stablecoin’s $48 Billion Collapse Spread
A Citi analyst said on July 21 that the contagion of a depegged stablecoin spreading eight- and nine-figure losses across the crypto lending and trading community appears to have run its course.
Which will be cold comfort to the roughly 150 people at crypto exchange Blockchain.com who were laid off on Thursday following the company’s $270 million loss to crypto hedge fund Three Arrows Capital. which had around $10 billion in assets and made a number of very risky investments in decentralized finance (DeFi) projects, including the algorithmic stablecoin project Terra/LUNA.
TerraUSD rose from nowhere to third place among stablecoins last year, with a market capitalization of $18 billion of dollar-pegged UST. But it maintained that peg through a complex arbitration system with its floating sister token, LUNA, which was managed by self-executing smart contracts.
On May 7, it briefly lost its peg – first by fractions of a cent, then by nearly 2 cents on May 9. Attempts to reassure investors failed and a run ensued. On May 10, it crashed to $0.80, then on May 13 to $0.40. By the end of the month, it was below $0.03 and its market capitalization had fallen from $18 billion to $220 million.
Three Arrows had invested heavily in LUNA, which as of early May had a market capitalization of $29.5 billion. At the end of the month, it was $750 million.
The hedge fund was unable to repay its loans, leaving a number of crypto lending companies, which offered extremely high interest rates – some over 20% – to people who got stuck in crypto- currency, in embarrassment. They then loaned it out both to small retail borrowers as oversecured loans and large sums to institutional investors like Three Arrows – known as 3AC – looking for aggressive returns to hedge interest rates. interest they paid.
“3AC was supposed to be the adult in the room,” said Nik Bhatia, professor of financial economics at the University of Southern California, Told CNBC. “Not only did they not cover anything, but they also evaporated billions in creditors’ funds.”
Bhatia, author of the 2021 book on digital currencies “Layered Money”, said that “the collapse of terraUSD and LUNA is ground zero… [in a] long and nightmarish chain of leverage and fraud.
three small waves
While much of the damage went through Three Arrows, two more waves resulted from the collapse of terra/LUNA – wiping out many smaller investors. The only bankruptcies in the $48 billion collapse are unlikely to have been businesses.
Crypto lender Celsius, which had invested heavily in a DeFi project that was indirectly but badly damaged by the terra/LUNA collapse, was separated from the Three Arrows debacle.
Read more: Stablecoin’s collapse sent Voyager Digital and Celsius down different paths to bankruptcy
He was the first to freeze client funds, but after a long struggle he went bankrupt on July 13. It lost $1.2 billion, with $5.5 billion in liabilities and $4.3 billion in assets, Bloomberg said.
Also Read: Bankrupt Crypto Lender Celsius: We Own Client Funds
That said, Celsius appears in Three Arrows’ bankruptcy filing for $40 million, according Bloomberg.
The second is Babel Finance, which froze withdrawals on June 17 citing, like others, “unusual liquidity pressures”.
Beyond that, another ripple is not financial but political. In the wake of the collapse and contagion, steps are underway in Congress to pass a stablecoin regulation bill this year that would require, among other things, 100% collateral reserves held in dollars or in US Treasury bonds.
Read more: Reports: House committee set to vote on ‘stable payments’ bill
This is despite the acknowledgment that a sweeping crypto regulation law will not happen until 2023.
The Ripple of the Three Arrows
Bit by bit, seven major lenders emerged over the next month, though Three Arrow’s bankruptcy liquidator named two dozen creditors, The Wall Street Journal said.
In total, about $2.8 billion is owed by Three Arrows, Bloomberg reported.
By far the largest was Genesis Global Trading, owned by Digital Currency Group, which lost $2.4 billion. He owns several other top crypto companies, including news site CoinDesk and Grayscale Bitcoin Trust.
Next came crypto lender Voyager Digital, with $687 million and BlockFi, which lost about $250 million. The former is bankrupt and the latter has struck a deal that could see him acquired for a song by the FTX exchange. This could make FTX a long-term winner, even though it lost a relatively small amount to Three Arrows – just like derivatives exchange BitMEX.
See also: Another company cuts withdrawals, highlighting the dangers of crypto lending
Voyager said customers will likely not get all of their funds back, but rather a purse that includes their own VGX tokens.
Along with Blockchain.com’s $270 million — and its cuts well beyond layoffs to include expansion plans and the withdrawal from Argentina — its derivatives exchange Derebit was also hit for $80 million. Exchange CoinList lost $35 million to Three Arrows, just as DeFinance Capital and lender Finblox limited withdrawals on June 17, CryptoSlate reported.
Ripples upon ripples
There were other dominoes. Thai stock exchange Zipmex halted withdrawals on July 21, following losses on Celsius and Babel Finance. Lender Vauld froze withdrawals on July 4, not after losses directly linked to Three Arrows or Terra/LUNA, but due to nearly $200 million since June 12 — actually, a run.
For all PYMNTS Crypto coverage, subscribe daily Crypto Newsletter.