The simple business model of making money on the spread between lending and interest paid to users seems sound, especially if the loans are over-collateralized and issued to trustworthy parties. The practice of lending can be traced back over 5,000 years to 3000 BC in ancient Mesopotamia; cryptocurrency lending is just an evolution. 

So, how did things go so wrong? We’ll get into that below, but let’s consider how and why so many crypto interest account customers were blindsided. 

The typical markers potential users consider before signing up were proven worthless:

• Many intelligent people invested in it! (In 2021, BlockFi raised a $350 million Series D at a $3 billion valuation, counting investors like the Peter Thiel-associated Valar Ventures, Bain Capital, and more.)
• Lots of other people used it! (BlockFi had over 650,000 users, Celsius about 500,000, and Voyager claimed over 3,500,000.) 
• Its leadership team is reputable and has won awards! (BlockFi Founders made the Forbes 30Under30, as did FTX Founder Sam Bankman Fried and Luna’s Do Kwon. Alex Mashinsky was on Business Insider’s “The Silicon Alley 100: New York’s Coolest Tech People” in 2010.)
• Its founders weren’t anonymous! (It’s painful to write that this is actually a big deal in the cryptocurrency industry.)
• It was part of a publicly traded company! (Voyager was listed on the Toronto Stock Exchange TSX: VOYG)
• The rates aren’t too obscene! (“4% on Ethereum? That’s not too crazy– things like OlympusDAO were advertising 267% APY.”)

The following article explores the causes and series of events that caused the crypto interest account dominos to fall in 2022. 

A Timeline of How and Why Most Crypto Interest Failed in 2022

Get ready for an action-packed timeline that rivals Saving Private Ryan.

2020 and 2021 saw a proliferation of crypto interest account offerings, all claiming to provide sound risk management, safe and secure lending practices, and advertising quick and easy withdrawals at any time. Users flocked to these accounts, and many upstarts began spinning up entire companies clinging to Anchor Protocol, a dApp offering around 20% APY on Terra’s stablecoin UST. 

Everything worked fine until Luna collapsed, and the industry entered a nuclear bear market in 2022. 

The first glimpse was in February 2022, when BlockFi, the leading crypto interest account, ceased all BlockFi Interest Account offers and paid $100 million in fines to the SEC and 32 states. No funds were lost, and users were able to withdraw their assets. Assets left on the platform would continue to earn yield, and no new BIAs would be offered. 

Three months later, in May 2022, Terra, a $60 billion DeFi ecosystem featuring Anchor’s yield-generating app, collapsed. Anchor, a dApp in the LUNA ecosystem, paid roughly 20% APY in Terra UST stablecoin, and it was one of the many undisclosed strategies for several crypto interest accounts to generate yield. Terra’s collapse spurred over $300 billion in losses across the cryptocurrency economy in the following months. Singapore hedge fund Three Arrows Capital sustains a loss of $200 million in LUNA tokens. 

And that was the nuke, the shockwaves soon making their way to the doorstep of some of the largest cryptocurrency interest accounts.

On June 12th, 2022, Celsius, the second largest crypto interest account, halted all withdrawals, swaps, and transfers and filed for bankruptcy soon after. Voyager soon followed.

The market continued to plummet

 FTX loaned $275 million to BlockFi, a $400 million credit facility, and $485 million to Voyager, allegedly in an attempt to stabilize the market after the Celsius news. In late June, 3AC defaulted on a loan from Voyager for 15,250 bitcoin (about $381 million) and $350 million in USDC.

On July 2nd, crypto hedge fund Three Arrows Capital (3AC) filed for Chapter 15 bankruptcy to protect its US assets from creditors. On July 18th, crypto broker Genesis Global Trading filed a $1.2 billion claim against 3AC. On July 13th, 2022, Celsius Network filed for Chapter 11 bankruptcy. On July 14, 2022, a court filing revealed Celsius has a $1.3 billion hole in its balance sheet. 

In August 2022, Hodlnaut paused all customer withdrawals and claims to have lost $190 million in the LUNA UST fiasco. The company was placed under creditor protection by Singapore’s High Court.

In November 2022, FTX collapsed. 

BlockFi, seemingly caught off guard, immediately paused withdrawals and filed for Chapter 11 bankruptcy; it had an outstanding unpaid $680 million loan to FTX’s affiliate hedge fund Alamada Research, and its $400 million credit facility was now gone. 

Salt Lending pauses customer withdrawals; it has used FTX for liquidity for its lending operations. 

Gemini Earn, a product by Gemini, pauses withdrawals. Gemini had partnered with Genesis Global Capital, a Digital Currency Group (DCG) subsidiary. Genesis had lent $2.3 billion to 3AC, which lost $560 million in LUNA.  

On January 19th, 2023, Genesis Global Capital filed for Chapter 11 bankruptcy protection. 

On February 8th, 2023, Salt Lending raised $64.4 million in funding and resumed operations. Some good news!  🙂 

On July 13th, 2023, Celsius Founder Alex Mashinsky was arrested and charged with fraud.  

In late September 2023, 3AC Co-founder Zhu was arrested at a Singapore airport while trying to leave the country. His Co-founder, Davies’ location is still unknown.

As of writing:

• Three Arrows Capital owes 27 creditors like Genesis and Voyager Digital, $3.5 billion
• Voyager expects its users will be able to recover about 35% of their cryptocurrency deposits– and if it prevails in the FTX litigation, that figure will rise to 63.74%. 
• BlockFi owes an estimated amount between $1 billion and $10 billion to over 100,000 creditors.
• Celsius owes around $4.7 billion to over 100,000 creditors
• Hodlnaut owes around $193 million to about 17,500 creditors
• Genesis owes over $3.5 billion to its 50 largest creditors, owing the collective amount of Gemini users $766 million.
• FTX owes its users between $6.4 to $8.9 billion to its users. 
• Gemini Earn users can expect to recover between 95% and 110% of their locked assets. 

We’ll keep this article updated as bankruptcy proceedings continue. 

Final Thoughts: Why Did Crypto Interest Accounts Fail?

Each cryptocurrency interest account seemed to have promise but failed in its own unique combination of a few interconnected causes: 

1. 1. The collapse of Luna/UST, which may be linked to one or a few malicious third parties– allegedly, FTX-affiliated Alameda Research had a significant short position on Luna failing, but there is currently no on-chain proof to substantiate this claim.
   2. Rumors increased withdrawal pressure, creating a doom loop for organizations with illiquid positions. This is similar to the bank runs in the 1920s and early 1930s that preceded the creation of the FDIC in 1933.
   3. Over-leveraged business models and illiquid positions. Celsius, for example, saw both losses in positions like UST and couldn’t meet withdrawal demands due to having its funds locked in DeFi contracts. 
   4. Dependence on other companies. Gemini on Genesis, BlockFi on FTX, etc. 
   5. Uncollateralized and poorly collateralized loans to irresponsible parties. Genesis Global Capital, a Digital Currency Group (DCG) subsidiary, had lent 3AC $2.3 billion with collateral valued at less than 50% of the loan amount. Gemini relied on Genesis for yield and allegedly unknowingly generated this yield through loans to 3AC, among other APY instruments. 
   6. Falling digital asset prices. Exacerbating everything, the early innings of a nuclear bear market. Loan collateral, often in digital assets but priced in USD, was becoming worth less by the hour, and organizations scrambled to repay their loans. 

To say most cryptocurrency interest accounts failed because of ignorance, greed, negligence, and incompetence isn’t wrong, but it doesn’t wholly address the systemic reasons that enabled such a catastrophe. 

The CeFi crypto interest account collapses are particularly disheartening because, to many, the industry seemed to have matured to the point where users could feel secure.

Building a company in crypto is a risky and experimental endeavor. Things go wrong, and things blow up often. For example, 850,000 bitcoins (about $21.25 billion today) were stolen in the Mt. Gox saga (750,000 belonging to customers) in 2014. Today,  Mt. Gox is often viewed as an unfortunate blip in the otherwise upward trajectory– Bitcoin’s price increased roughly 213x from its low point in the subsequent year to its all-time high 7 years later.

Knowing the fundamental weaknesses of cryptocurrency-associated products helps us understand how similar situations can be avoided in the future. The practice of lending assets has been around for millennia. If cryptocurrency is an evolution of money, it’s inevitable we see some safe, sound, and protected means to do so at scale, whether that be through CeFi companies or DeFi endeavors. 

One good place to start is guaranteeing customers complete visibility of how a company treats their assets. Not a company mouthpiece (Do Kwon, Alex Mashinsky, and Su Zhu all reassured their holders, customers, and lenders everything would be okay before everything being very not okay)– the industry needs something better. 

Customers need distinct protections and guarantees– they can’t simply be hit with a “you agreed to give us all your money in the check box in the Terms & Conditions!”

We’re eager and hopeful the cryptocurrency industry will absorb the shocks of these events and continue to grow into an antifragile and truly trustless system