FTX Contagion Revives Dreaded 2022 Crypto Knell

The phrase “halting withdrawals” in the crypto industry in 2022 is like black smoke billowing out of a building. Damage is unavoidable.

Technically, it means that a crypto exchange or lender has barred customers from receiving their money or digital tokens, usually due to a lack of assets on hand to meet redemption requests. The likely outcome is that the company will be difficult to recover from the devastation. In many cases, the next step is to file for bankruptcy.

Now, the rapid dismantling of former billionaire Sam Bankman-crypto Fried's empire, which included the FTX exchange and the crypto trading firm Alameda Research, has triggered a new wave of crypto exchanges and lenders suspending customer withdrawals in recent weeks.

The collateral damage adds to the list of casualties from the Terra blockchain's dramatic collapse earlier this year, which accelerated or directly led to the failures of crypto firms such as Celsius Network, Babel Finance, Voyager Digital, and Three Arrows Capital.

The disease has the potential to spread quickly. When one company abruptly refuses redemption requests, another faces a liquidity crisis. Market jitters frighten investors, prompting more withdrawal requests and exacerbating the panic. This is the pattern in digital asset markets, where there is no Federal Reserve or other central bank to backstop everything, as there is in the traditional financial system.

“For each player, you'll be in this situation where you suddenly have to manage how much information you want to reveal,” said Benoit Bosc, global head of product at cryptocurrency trading firm and liquidity provider GSR. “It could be more information than you want to reveal then.”

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BlockFi, Genesis

BlockFi, a crypto lender, halted client withdrawals from its platform on Nov. 10, citing a “lack of clarity” about FTX's current situation; this came two days after the FTX exchange halted customer withdrawals completely on Nov. 8. BlockFi later admitted to having “significant exposure” to FTX.

Genesis, a large crypto financial firm, announced last week that its lending unit had suspended redemptions and new loan originations due to “the extreme market dislocation and loss of industry confidence caused by the FTX implosion.” Following the failure of Three Arrows Capital earlier this year, the company suffered hundreds of millions of dollars in losses.

“When the tide goes out, you see who is swimming naked,” Bosc said, quoting Warren Buffett.

In a note, Nicholas Colas, co-founder of market research firm DataTrek Research, wrote that the current crisis will take time to resolve, and that “until then, this space will likely see more selling pressure.”

The following is a timeline of recent withdrawal suspensions by crypto firms:

• Nov. 8: The FTX exchange halted customer withdrawals, an FTX support employee said in the company's official Telegram group.

• Nov. 11: FTX US ceased processing crypto withdrawals. The same day, FTX Group companies – including FTX Trading and FTX US – filed for bankruptcy protection in the U.S.

• Nov. 10: Crypto lender BlockFi halted withdrawals from its platform, citing the “lack of clarity” around FTX's current situation at that time. (In a Nov. 14 update, the lender acknowledged its “significant exposure” to FTX.)

• Nov. 11: FTX US ceased processing crypto withdrawals. The same day, FTX Group companies – including FTX Trading and FTX US – filed for bankruptcy protection in the U.S.

• Nov. 13: The Hong Kong-based crypto exchange AAX said it had suspended withdrawal for as long as 10 days due to the failure of an unidentified third party. The company said it had no financial exposure to FTX or its affiliates. On Nov. 23, AAX announced to close out derivatives positions.

• Nov. 15: The Japanese crypto exchange Liquid, owned by FTX, suspended both fiat and crypto withdrawals on its Liquid Global platform “in compliance with the requirements of voluntary Chapter 11 proceedings in the United States.” The exchange announced on Nov. 20 that it had paused all forms of trading on its platform.

• Nov. 15: Crypto lending platform SALT said it had halted all deposits and withdrawals on its platform due to FTX exposure.

• Nov. 16: Crypto investment bank Genesis Global Tradings lending unit temporarily suspended redemptions and new loan originations, citing “in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion.”

• Nov. 16: The Winklevoss brothers Gemini exchange said it was pausing withdrawals on its yield-earning Earn program as the exchange suffered a $485 million rush of outflows following Genesis' announcement earlier in the day. Genesis Global Trading powered the Earn program for Gemini.

And here is a timeline of withdrawal suspensions from earlier this year:

• June 12: Celsius Network says that it is “pausing all withdrawals, swaps and transfers between accounts.” (Celsius filed for bankruptcy on July 13.)

• June 17: Babel says “redemptions and withdrawals from Babel Finance products will be temporarily suspended.”

• June 23: CoinFLEX announces it is “pausing all withdrawals.”

• July 1: Voyager Digital says it is “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” (Voyager filed for bankruptcy protection on July 5.)

• July 4: Vauld says that it “made the difficult decision to suspend all withdrawals, trading and deposits.”

• July 20: Zipmex says that it is “pausing withdrawals until further notice.”

• August 2: ZB.com announces that “deposit and withdrawal services are now suspended” after losing nearly five million in a suspected hack.

• August 8: Hodlnaut says it “will be halting withdrawals, token swaps and deposits with immediate effect.”

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