Want to Strike Terror in Crypto Markets in 2022? Just Say You’re Suspending Withdrawals

Bank runs are nothing new. Those frightening incidents when too many customers demand their money back at the same time have destroyed many financial institutions over the years.

Traditional banks largely solved that with deposit insurance, a guarantee from the Federal Deposit Insurance Corp. to make customers whole up to a certain amount if their bank fails.

With no such protection in crypto, the phrase “suspending withdrawals” has become a source of fear in 2022, a sign of deep trouble at firms that have tried to create a modern version of banking through digital assets. Customers who trusted the lender or exchange with their cryptocurrencies are suddenly unable to get the assets back.

One example is crypto broker Voyager Digital. Its Canadian-listed stock plunged 42% on July 4 after it said it was “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” The situation got worse days later when the company filed for bankruptcy.

Voyager's troubles came as crypto prices remained hugely depressed from their peaks. And it illustrates that when a crypto firm pauses withdrawals – warning the world of serious liquidity issues – it will have trouble restarting them outside of bankruptcy court.

“The problem is, once the withdrawal suspensions happen, it’s too late for the investors,” said Paul McCaffery, co-head of equities for Keefe, Bruyette & Woods.

When crypto lenders go broke

Following the collapse of the stablecoin terraUSD (UST) and the implosion of crypto hedge fund Three Arrows Capital, known as 3AC, a swath of liquidity-strapped crypto lenders found that they could no longer meet customer demands.

Throughout June and early July, lenders including Celsius Network, Babel Finance, CoinFLEX, Voyager, Vauld and Zipmex halted withdrawals and transfers. Others such as CoinLoan and Finblox allowed withdrawals to continue, but at a reduced limit.

When crypto lenders go broke, the traditional financial regulatory system can’t help. The FDIC, which backstops deposits at conventional banks in the U.S., released a fact sheet on July 29 reminding the public of that.

Some lenders, such as Zipmex, have been able to recover and start releasing select tokens back to users’ wallets. The majority of lenders, however, have kept withdrawals paused, with Celsius joining Voyager in bankruptcy.

No one can predict how far the domino effect of solvency issues will run, but it’s a safe bet crypto players will shudder if any other firms warn they are suspending withdrawals.

“The announcements are decelerating but not likely quite done yet as the fallout from the 3AC solvency continues to play out,” McCaffery wrote in an email to CoinDesk. “I am hopeful that all of this bloodshed will result in better risk management processes embedded in the business models going forward.”

Timeline of suspended withdrawals

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

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

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

July 1:Voyager Digital says that it is “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” (Voyager filed for bankruptcy 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 that it "will be halting withdrawals, token swaps and deposits with immediate effect."

UPDATE (August 8, 2022, 01:48 UTC): Adds withdrawal announcement from Holdnaut.