The search continues for the source of TerraUSD Crypto Bank Run

Cryptocurrency investors are still trying to figure out what led to the dramatic collapse in May of a pair of digital tokens that were worth more than $40 billion earlier in the month.

Last week, analytics firm Nansen singled out loan company Celsius as one of the few users who contributed to the collapse of the luna and terraUSD cryptocurrencies. While Celsius disputes the narrative, the search for information on the cause of the sinking shines a light on the opacity of the world of decentralized finance.

In DeFi, it’s not easy to understand who is providing money for loans, where money is flowing, or how easy it is to trigger currency crashes. This is one of the reasons regulators are concerned about the impact of DeFi on investors and the broader financial system.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composition: Elizabeth Smelov

Many investors place their assets in crypto products that offer healthy returns; these services then lend the funds to others. The value of assets held on DeFi platforms, referred to as “total locked value,” rose from $600 million at the start of 2020 to a high of $317 billion on December 26, 2021, according to the DeFi Llama website. It has now fallen to around $106 billion, down alongside falling prices in the overall cryptocurrency market.

The pegging protocol was a popular service for terraUSD holders as it offered users a 19.5% interest rate on loaned crypto. But in May, a flood of investors began withdrawing their money from Anchor, which ultimately led to the downfall of terraUSD and luna. It is unclear who instigated the sale and whether they intended to trigger the collapse.

Nansen’s report claims that Celsius was among a handful of users who first withdrew hundreds of millions of dollars from Anchor early on, possibly sparking a wider sell-off on the platform.

Celsius said its risk management group recognized “changes in the stability” of the platform that prompted it to remove its assets just to protect its clients’ money. The company has not profited from the instability, he said.

Celsius takes deposits from customers and then lends that money to other users, like exchanges and market makers. It collects a fee for the service and then passes that revenue on to its users as an interest payment. Celsius offers users returns of up to around 14%, so Anchor’s 19.5% return was attractive to the company.

“It’s similar to traditional securities lending,” said Steven Ehrlich, CEO of Voyager Digital.,

a Canadian-listed company that offers a variety of crypto-focused financial services, some of which offer a stated return. “It’s almost identical to what happens in the mainstream world.”

But these products and services don’t work like traditional financial services.

“It’s marketed as a better savings account and it’s not,” said Cory Klippsten, chief executive of crypto services firm Swan Bitcoin.

There are no standards for custody, risk management or capital reserves. There are no transparency requirements. Investors often don’t know how their money is managed or who the counterparties are.

“What you’re really doing is you’re an unsecured lender,” Klippsten said. “They collect personal loans and ultimately invest them in lightly regulated activities.”

For example, it was unclear to investors that their money in a Celsius account could have been invested in the Anchor platform. Celsius, Voyager and other industry players generally do not disclose their counterparties.

Regulators are increasingly concerned about the risks of these lending platforms. In April, Celsius, pressured by regulators, stopped accepting new remunerated deposits from non-accredited investors in the United States. A similar program planned by Coinbase was scrapped after opposition from US regulators.

Also, unlike traditional bank accounts, there is no deposit insurance. If a DeFi service crashes or is hacked – and they have been known to be hacked – users are largely on their own.

“In the crypto world, anyone and their dog can release a product,” said Michael Rosmer, the founder of DeFiYield, which publishes software to audit DeFi projects. “We discovered very quickly that you have this plethora of instruments and complex products, and there is no control.”

Write to Paul Vigna at [email protected]

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