Crypto bank run in 2022 catalyzed by institutional withdrawals: Research

The 2022 crypto bank run induced by the failure of multiple giants in the ecosystem has a lasting impact on the crypto industry. A new research report from the Federal Reserve Bank of Chicago (FRBC) has identified several key factors and catalysts that accelerated the last year’s crypto crisis.

The research report identified that withdrawals by crypto whales and large account holders on centralized exchanges including some of the key institutional accounts, created a liquidity crisis which eventually led to the bank run.

The first crisis came in the form of the TerraUSD collapse, which started the customer outflow saga for many crypto lenders with exposure to the Terra-Luna ecosystem. Celsius and Voyager Digital saw outflows of 20% and 14% of their customer funds, respectively, over 11 days after the news of the collapse surfaced. Celsius has also invested nearly a billion dollars in Terra’s failed algorithmic stablecoin.

The second major crisis, catalyzed by high customer outflows, came in the form of Three Arrow Capital’s (3AC) downfall in July. Celsius and Voyager Digital saw another round of outflows of 10% and 39%, respectively, as a result of their exposure to now-bankrupt 3AC.

3AC became a major source of contagion in the crypto industry as multiple firms had lent billions in crypto assets to the hedge fund, resulting in a major crisis after its downfall. Genesis provided 3AC with loans totaling around $2.4 billion, BlockFi provided $1 billion, Voyager Digital provided $350 million and 15,250 bitcoins (worth approximately $328 million in July 2022), and Celsius provided around $75 million.

The third major crisis came in the form of the FTX collapse in November. The crypto exchange itself saw outflows of over 37% in customer funds as news about its financial instability became public. Genesis and BlockFi customers withdrew about 21% and 12% of their investments following FTX’s downfall.

Although most of these failed crypto platforms had a significant retail customer base, it was the sophisticated institutional client withdrawals that led to the major crisis. Before June 9, 2022, several institutional clients have given Celsius a funding contribution of between $1.9 to $2.0 billion.

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Owners of large-sized accounts, defined as those with…