The latest round of insolvencies in the crypto lending crisis has extended to Southeast Asia, where cryptocurrency exchange Zipmex froze withdrawals and Singapore-based lender Vauld revealed the extent of its losses.
While a number of other crypto lenders, including Voyager Digital, Celsius Network and Babel Finance have joined Vauld in bankruptcy — technically Vauld has a “moratorium order” — Zipmex is the first exchange hit by the ripples expanding outward from the $48 billion collapse of the Terra/LUNA stablecoin in May. The first and biggest victim was crypto hedge fund Three Arrows Capital, whose insolvency triggered much of the fallout.
The wave of bankruptcies and near misses — like lender BlockFi, which was rescued by FTX exchange CEO Sam Bankman-Fried in what may turn out to be an acquisition — have caused enough fear and mistrust in the industry that it is thought to have helped push bitcoin below $20,000 over several weeks.
Reflecting those concerns, the U.S. Department of Justice said Thursday (July 21) that it had charged three people, including a former Coinbase manager, with insider trading, in what authorities are calling the first such case involving cryptocurrency.
Crisis Hits Traders
Thailand-based Zipmex halted customer withdrawals on Wednesday (July 20). Aside from its home country, it also services cryptocurrency traders in Indonesia, Singapore and Australia.
“Due to a combination of circumstances beyond our control including volatile market conditions, and the resulting financial difficulties of our key business partners, to maintain the integrity of our platform, we would be pausing withdrawals until further notice,” it announced on Twitter.
In Zipmex’s case, the problem was not market volatility but Babel Finance’s default on a $100 million loan, CoinDesk reported, citing an industry executive briefed in the situation. A Babel spokesperson said the loan was for far less than $100 million.
Babel Finance froze withdrawals on June 17, citing “unusual liquidity pressures.”
In keeping with the rest of the crisis, Zipmex’s downfall was a crypto lending platform of its own called ZipUp, it added.
Nonetheless, its withdrawal freeze marks an expansion of the ripple effect, which had so far been limited to crypto lenders offering eyebrow-raising yields. Celsius, for example, offered 18%.
That said, many top U.S. exchanges have started lending programs, offering investors sky-high rates that can reach more than 20%. The Securities and Exchange Commission (SEC) has argued that these are illegal securities offerings, forcing BlockFi to pay $100 million to settle a lawsuit and barring Coinbase from offering one until it registered as a broker-dealer.
In many ways, the crisis was caused less by the Terra/LUNA collapse than by the lenders’ aggressive and even reckless deployment of clients’ capital into high-return, high-risk decentralized finance (DeFi) through large loans to investors like Three Arrows or directly in Celsius’ case.
While Zipmex’s Thai license forbade it from lending out exchange customers’ funds, ZipUp was a standard crypto lender, offering exceptionally high interest on funds locked in by customers.
The Thai Securities and Exchange Commission has asked Zipmex for more information about the withdrawal freeze, including whether ZipUp lent funds to Celsius or Babel Finance.
Risk Management Debt Comes Due
As for Vauld, it revealed on July 20 that it owes $402 million to creditors, with the lion’s share of $363 million from retail investors, The Block reported. It is short about $70 million.
Vauld said that its insolvency was not bad loans but rather direct exposure to the Terra/LUNA stablecoin ecosystem and mark-to-market losses on trades of several other cryptocurrencies.
Asset liability mismatches were also a cause, Vauld told The Block, citing too many longer-term loans due in three to 11 months made with short-term deposits. That’s something that Galaxy Digital CEO Mike Novogratz cited as a cause of the crisis at the Bloomberg Crypto conference on July 19, saying it showed that industry investors “really had very, very little concept of risk management.”
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