Back-to-back downfalls of promising crypto projects over the past year have been blamed by the Federal Reserve Bank of Chicago (FRBC) for the ongoing banking crisis in the US. In a new analysis, FRBC has said that large withdrawals by institutional crypto investors triggered a liquidity crisis so severe that it left the traditional banking system in the US gasping for breath. Only last month, three banks in America closed their business due to cash crunch.
decline of blockfi, Celsius, ftx, Produce (in partnership with Gemini), and voyager digital Named as the most influential crisis maker in the FRBC report.
the fall of EarthWhich brought the crypto market to a standstill in May 2022, a trigger point for serious unrest for other players in the sector.
Terra’s native stablecoin UST lost its parity to the US dollar which put its holders’ finances at risk. it was the cause of the accident Earth, Terra’s LUNA and UST tokens at that time Allegedly About $45 billion (about Rs 3,70,004 crore) was lost within three days.
Many crypto firms have resorted to laying off members of their staff to keep their businesses afloat.
Eventually, crypto-related firms like three arrows capitalCelsius, and Voyager ended up filing for bankruptcy after recording large outflows of funds.
“Number of Customers” of each firm as of its bankruptcy filing Figure 1 potentially illustrates the peak customer numbers of each, as crypto-asset platforms decline in popularity during the early months of 2022 and customers left during the run described in this article,” FRBC said in its reports,
“To attract customers, these platforms offered and marketed high-yield investment products with the ability to withdraw funds on demand. They used clients’ funds for illiquid and risky investments (eg, in 3AC or Anchor Protocol) in an effort to generate the high returns promised to their clients. The report noted that in response to negative shocks, customers had an incentive to run to avoid losses borne by others.
Within the first two weeks of last month, the US saw three big crypto-friendly banks close Fragments under market pressure. Regulators who approved the closure of these banks said that their unsustainable business conditions could pose a serious threat to the US economy.
To minimize the financially damaging effect on the market, the US authorities immediately announced that all custodians associated with the collapsed banks would have access to their funds.
“Overall, while crypto-asset activities are sometimes described as unregulated, it may be more accurate to describe many crypto-asset firms as attempting to evade the current regulatory system – which They will be required to make significant disclosures about the financial risks they face in their products, including those products that led the platform to file for bankruptcy,” the FRBC study said.
Currently, the overall financial sector along with the crypto market is going through a volatile phase. Furthermore, the frequent interest rate hikes by the Fed in the US have added to the existing pressure on the financial market, including the crypto sector.
The valuation of the cryptocurrency sector has declined significantly from its highest point of $3 trillion (roughly Rs. 2,46,86,250 crores) to the current capitalization of $1.14 trillion (roughly Rs. 93,54,177 crores). coinmarket cap,