From Terra/LUNA and Three Arrows Capital to Celsius and FTX, a lot of cryptocurrency firms — particularly crypto lenders — went up in smoke.
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It's hard not to look back at 2022 as a year dominated by the crash of the UST algorithmic stablecoin and the string of insolvencies and bankruptcies that followed.
The $48 billion fall of UST and its partner token LUNA led to a string of bankruptcies by a half dozen of the top crypto lenders — and then the spectacular implosion of the second-largest global cryptocurrency exchange, FTX.
What were the 50 biggest crypto stories of 2022? You decide!
Since then, Bitcoin — which had dropped from almost $69,000 to $34,000 — halved again. And at about $17,000, it is now down 75% from November 2021's all-time high.
But even worse, millions have seen their crypto investments disappear — lost first to crypto lending schemes offering returns that proved far too good to be true, and second to alleged malfeasance by one of the most popular exchanges on the planet.
In many ways, the bankruptcies have done much more damage to digital assets than the falling price of always-volatile Bitcoin, as it resurrected the idea of crypto as far too risky. The goings on at FTX have also sparked fresh calls for stricter regulation — and even outright bans.
In the course of that, many centralized and DeFi projects were lost. Here's a look back.
While it wasn't technically a bankruptcy, the Wonderland DeFi project collapsed and was shut down by its founder after it was revealed that one of its leaders was an infamous fraudster and ex-convict, Michael Patryn.
While Patryn had departed QuadrigaCX years earlier, Wonderland's community — otherwise known as "Frog Nation" — exploded when he was unmasked on Twitter as "0xSifu" — its treasury manager. Things only got worse when Wonderland co-founder Daniele Sestagalli admitted that he knew of Patryn's past but believed in second chances.
While 0xSifu/Patryn was overwhelmingly ousted in a community vote, another one asking if the project should be wound down and funds returned came out narrowly in favor of continuing, 55% to 45%. Nonetheless, Sestagalli declared:
"Wonderland experiment is coming to an end. It is clear from the vote that the community is divided. The core and heart of Wonderland is still the community. If we cannot find agreement on whether to continue or not, it means that we failed."
For someone who claims not to be on the run, Do Kwon — co-founder and CEO of the company that created the UST algorithmic stablecoin ecosystem that imploded in May — sure is hard to find.
It's not clear how well that will stand up, but with some 280,000 South Koreans having invested in UST and LUNA, they're apparently going to try.
Bitcoin — and really the whole crypto market — collapsed with it, dropping from $39,000 on May 4 to $29,000 on May 11, and then again from $29,000 to $19,000 in the second week of June.
Kwon was never accused of being humble. He referred to himself as "the Master of Stablecoin" and had a penchant for slashing back at Twitter opponents with comments like "continue in poverty ser."
Then there was the time — in a comment that really, really did not age well — he replied to a long thread about bank runs by economist Frances Coppola that ended with her saying:
"Self-correction mechanisms that rely on financial incentives do not work when panicking humans are stampeding for the exit."
"I don't debate the poor on Twitter, and sorry I don't have any change on me for her at the moment."
The collapse was felt far outside crypto, with Treasury Secretary Janet Yellen and finance ministers around the world jumping on it as both a reason to rein in and regulate stablecoins, and to push harder for central bank digital currencies. Nearly all of the stablecoin laws under consideration mandate holding fiat currencies in reserve, or very liquid investments such as U.S treasuries.
On May 25, Babel Finance raised $80 million at a $2 billion valuation. On June 17, the Hong Kong-based crypto lender halted withdrawals.
What happened? It's proprietary trading desk happened. According to reports, it lost more than $280 million — 8,000 BTC and 56,000 ETH — in the week when Bitcoin dropped from $30,000 to $20,000 because of "unhedged positions" in its proprietary trading accounts that "chalked up significant losses, directly leading to forced liquidation of multiple trading accounts," according to a fundraising deck later seen by The Block.
That team, it added, "operates several trading accounts not controlled or monitored by the trading department; no trading mandate or risk controls were implemented for these accounts; no [profit and loss] was reported" and its orders "were not recorded in the system."
They did, Bloomberg reported, use customer funds. The company is restructuring, reportedly seeking to turn debt into convertible bonds and sell more of those bonds, turning its largest creditors into shareholders.
Three Arrows Capital
Three Arrows Capital co-founders Zhu Su and Kyle Davies were — as Enron liked to say — the smartest guys in the room. They were such geniuses that investors kept shoveling money at them without asking how they were investing it, and crypto leaders were turning over nine-figure bucketloads of crypto without asking for collateral.
Their Singapore-based fund had $18 billion in assets under management at its height — but it turned out 3AC, as it was known, was making its outsize returns by making very big bets on DeFi projects including the LUNA token that was used for the arbitrage system that maintained UST's dollar peg.
Other bad bets included staked Ether — stETH — a proxy token for Ether locked into staking the Ethereum 2.0 blockchain before it went live that depegged, sending its value down below the ETH it represented.
And, it was heavily invested in the Grayscale Bitcoin Trust, a sort of proxy ETF that bought Bitcoin and sold shares in the company. When actual ETFs began opening around the world, the share price went from a 20% premium to the value of its holdings to a 20% deficit over the course of 2021.
But like Babel Finance during that fateful week in early June — Bitcoin dropping from $30,000 to $20,000 "ended up being kind of the nail in the coffin," Zhu said.
A court of the British Virgin Islands ordered the firm liquidated on June 27 after it defaulted on a $650 million-plus loan from Voyager Digital (which was the next domino to fall.)
But not just for them. Other than Celsius, almost every crypto lender than halted withdrawals or went bankrupt was badly hurt by 3AC's failure — meaning they didn't just have crypto investors at the invest-in-a-hedge-fund level angry at them, they had millions of people who'd put a little money into crypto earn schemes being told the pair were behind their frozen funds.
Explaining why they've been keeping a low profile, Zhu said:
"For Kyle and I, there's so many crazy people in crypto that kind of made death threats or all this kind of noise. We feel that it's just the interest for everyone if we can be physically secured and keep a low profile."
The first of the crypto lending firms to declare bankruptcy following the collapse of LUNA and subsequent fall of the 3AC crypto hedge fund, Voyager Digital was caught out by two things: the exceptionally high interest rates it offered clients when banks were offering fractions of a percent, and its own bad lending practices.
Specifically, it loaned $350 million in USDC and 15,250 BTC to 3AC — totalling more than $650 million — without collateral. Why? Well it was offering customers of its Voyager Earn program up to 10% yield for staking any of several dozen tokens. That requires quite a hefty return on loaning out those funds at a time when banks were offering well under 1%.
This is what 3AC offered, until it didn't when the staggeringly risky DeFi investments it was betting on went sour. With a big hole and $1.3 billion in assets remaining, Voyager CEO Stephen Ehrlich first cut the daily withdrawal limit to $10,000 from $25,000 on June 23, before halting all activity on July 1. Four days later, he filed for Chapter 11 bankruptcy — saying the $110 million in cash and crypto on hand would give it the liquidity to reorganize.
Voyager made several missteps. A plan to repay creditors with its own tokens and shares in a reorganized firm fell flat. It was also criticized by the Federal Deposit Insurance Corporation (FDIC) for making "false and misleading statements" that implied customers' deposits were insured when only Voyager's own bank account was. Reorganization proved impossible.
Insult was added to injury when the $1.4 billion winning bid that Bankman-Fried's FTX US later made for Voyager's assets collapsed with that exchange's own bankruptcy last month.
Futures exchange CoinFLEX flat out halted withdrawals on June 23 — citing both "extreme market conditions" and what it said was "uncertainty around a certain counterparty" that it later identified as Roger Ver, a very early Bitcoin investor nicknamed "Bitcoin Jesus" who is also the driving force behind Bitcoin Cash.
After Ver said rumors about him being behind the suspension were untrue, CEO Mark Lamb went on Twitter to say:
"Roger Ver owes CoinFLEX $47 Million USDC. We have a written contract with him obligating him to personally guarantee any negative equity on his CoinFLEX account and top up margin regularly. He has been in default of this agreement and we have served a notice of default."
Lamb also called "blatantly false" Ver's comment — which cited only a "counterparty" not CoinFLEX — that it owed him any debts.
In late September, CoinFLEX announced a reorganization plan that would give creditors 65% of the company, while original investors, including the founders, would forfeit that equity.
Back in June, Celsius Network spooked its users by declaring it was suspending withdrawals in a shock announcement. Hours earlier, the company's CEO had denied there were issues — lashing out at what he called "FUD and misinformation."
"Extreme market conditions" were blamed for the drastic move — leaving a whopping 1.7 million users frozen out of their savings. About 300,000 of them had a balance of over $100.
At one point, the embattled lender was offering annual percentage yields of 18.63% with interest paid weekly — and in hindsight, such returns were simply too good to be true.
The decision to freeze withdrawals caused customers to lose confidence in Celsius, not least because updates on what was going on were very hard to come by. And even if accounts were reopened, the business would have been a shell of its former self as customers rushed to be reunited with their funds.
There are glimmers of hope for Celsius customers. In December, a bankruptcy judge said a small group of users could receive their deposits back. Unfortunately, this $50 million payout is a drop in the bucket considering Celsius customers are owed billions.
They now face a long and uncertain path as they battle to be reunited with their funds, and there are no guarantees that they'll receive the full amount they're owed.
Singapore-based crypto lender trading platform Vauld died on the Fourth of July. Well, technically that's when it halted trading. The bankruptcy didn't come until later that month, but the problems began on June 12, when a run on deposits began that saw almost $200 million withdrawn.
Like many crypto lenders — and the FTX exchange for that matter — the end came after days and weeks of CEO and co-founder Darshan Bathija saying that it would operate normally. The company reportedly owes its mainly retail clients about $360 million, and about another $35 million to a secured creditor.
On June 16, he said the Peter Thiel-backed company said it had "always maintained a balanced and conservative approach to liquidity management."
Over the previous few days, he added at the time:
"All withdrawals were processed as usual and this will continue to be the case in the future… and we are laser-focused on putting our heads down and building for that future. We remain committed to enabling you to build wealth."
Vauld's future remains uncertain, as it has spent most of the past five months in due diligence discussions with Nexo, another crypto lender in talks to acquire it in hopes that Vauld's 800,000 customers will help it get a foothold in Asia.
The German crypto bank is one of the few firms that didn't halt withdrawals before shutting its doors. It filed for insolvency on Aug. 9, citing falling crypto prices and the insolvency of Celsius, as well as other macroeconomic headwinds.
Calling it "necessary to ensure the safest path forward for all our customers," the company said:
"You have guaranteed access and will be able to deposit and withdraw all funds freely at any time. For the time being, nothing will change and Nuri's app, product and services will continue to run."
There was a Dec. 18 deadline to withdraw funds.
On Aug. 8, crypto lender Hodlnaut joined the list of firms halting withdrawals.
Eight days later, it went into bankruptcy due to a $190 million loss sustained in the LUNA/UST crash, falling crypto prices, rising withdrawals and "issues relating to certain users who have deposited substantial amounts of cryptocurrency with Hodlnaut."
However, in late November, word emerged that the company is facing a police probe for misrepresenting its exposure to UST.
The crypto miner filed for Chapter 11 bankruptcy on Sept. 23, citing both the effects of the crypto winter and the rising cost of power in Texas.
The company, which has mining facilities and hardware, a hosting service and a BTC mining pool, owes about $500 million to some 200 creditors.
Major partners like Compass Mining said that they had been told the reorganization would not affect services.
You'll be shocked to hear that Freeway, a crypto staking platform that offered investors returns of up to 43% on its "Supercharger" product, halted withdrawals on Oct. 23.
The problem, it tweeted a few days later, was that "one of Freeway's trading strategies appears to have failed and caused a substantial loss to be incurred" due to the "unprecedented" rise in the U.S. dollar and market volatility.
Its strategy, it said, was to bring in new management for its remaining funds while running four simultaneous recovery plans, about which it gave very few details.
When Sam Bankman-Fried's crypto empire collapsed last month, it did so in record time.
Bahamas-based FTX was overwhelmed by a bank run — putting the world's second-largest exchange under strain. That was just four days after a CoinDesk scoop revealed that Alameda Research — FTX's sister trading firm — was holding billions of dollars of FTT on its balance sheet. FTT is FTX's native token, and this raised serious questions about the financial health of both businesses. By Nov. 11, FTX Group had filed for bankruptcy.
The bad news just kept coming: FTX had loaned Alameda $10 billion in customers funds — that it had no right to use — to cover earlier losses, but then lost most of that, leaving one million customers looking at an $8 billion hole in the company's books.
Allegations of records set to auto-delete and coding that allowed the transfer of funds from FTX to Alameda without alerting the firm's legal and compliance teams followed, as did reports that Alameda CEO and SBF's sometimes girlfriend Caroline Ellison told staff she, Bankman-Fried and others knew they were misusing customer funds.
SBF is now facing civil enforcement action from the SEC and CFTC, with the Southern District of New York filing eight criminal charges. He was arrested in The Bahamas hours before he was due to testify to the House Financial Services Committee. Bankman-Fried has been denied bail and is now behind bars as efforts get underway to extradite him to the U.S. The fallen entrepreneur has suggested he'll fight any attempt to send him stateside.
Crypto lender SALT blamed its own withdrawal halt, announced on Nov. 15, on FTX.
"Until we are able to determine the extent of this impact with specific details that we feel confident are factually accurate, we have paused deposits and withdrawals on the SALT platform effective immediately," CEO Shawn Owen told customers.
He did not make clear exactly how FTX impacted SALT.
One of the first victims of 3AC, BlockFi's 2022 has to be among the worst even in this list of companies we've lost.
In June, it was on the ropes due to the collapse of 3AC and the atmosphere of panic, and halted withdrawals. Then Sam Bankman-Fried rode to the rescue, offering it a $250 million credit line that was eventually expanded to $400 million, and an option for FTX US to acquire BlockFi.
BlockFi's CEO Zac Prince tweeted on July 1:
"So, what events led up to this deal with FTX US? Crypto market volatility, particularly market events related to Celsius and 3AC, had a negative impact on BlockFi. The Celsius news on June 12 started an uptick in client withdrawals from BlockFi's platform despite us having no exposure to them. In the same week, 3AC news spread further fear in the market."
While BlockFi only lost $80 million to 3AC — far less than many other crypto lenders, Prince noted — it had to halt withdrawals. As for the FTX deal, he explained, it was the only offer of capital that wouldn't give existing clients a haircut or put them behind other creditors.
"Ultimately, we found a great partner in @FTX_US, who shares our commitment to clients. This represents the best path forward for all @BlockFi stakeholders and the crypto ecosystem as a whole… there is now even more upside in the future."
Right up until FTX imploded. Now, BlockFi owes FTX $275 million. But, it has $355 million frozen on the bankrupt exchange. Worse, bankrupt Alameda Research now owes BlockFi $671 million. It has sued for the collateral, Bankman-Fried's shares of stock and crypto trading platform Robinhood.
Its biggest creditor is Ankura Trust Company, which is owed $729 million on behalf of one or more other creditors. And Peter Thiel, a Vauld investor, also owns 19% of BlockFi, so he'll see a steep hit.
Adding insult to serious injury: the SEC is still owed $30 million, and will likely be ahead of regular creditors in line to get it.