Whales Caused Crypto Banks To Go Belly Up in 2022, Study Finds

Researchers at the Chicago Fed observed that platforms used customer funds for risky investments to generate promised high returns, and customers ran to avoid potential losses

article-image

Hendrickson Photography/Shutterstock, modified by Blockworks

share

A recent study uncovered that the 2022 crypto bank runs were predominantly sparked by whale account holders, including sophisticated institutional customers.

Large account holders with investments above $500,000 demonstrated the highest withdrawal rate at Celsius, researchers at the Federal Research Bank of Chicago found. 

These customers proportionately withdrew a significant portion of their funds compared to other customer groups. Notably, about 35% of withdrawals originated from account holders with over $1 million in investments.

The study also noted that the platforms faced run risks as they permitted customers to withdraw funds at will while utilizing those funds for risky and illiquid investments, aiming to fulfill the promised high investment returns.

A notable example of such instability occurred during an unprecedented episode when FTX experienced a rapid withdrawal of 25% of customer investments within a single day.

“These episodes together formed a classic financial crisis in a novel setting that has raised urgent policy concerns,” wrote research assistant Radhika Patel and senior economist Jonathan Rose.

The study examined customer fund outflows from BlockFi, Celsius, FTX, Genesis and Voyager, but only focused on the breakdown of large account withdrawals specifically in the case of Celsius.

Celsius and Voyager saw significant outflows of 20% and 14% of customer funds respectively within 11 days following the collapse of the TerraUSD stablecoin. BlockFi experienced estimated outflows of $3.3 billion from June to Nov. 2022. FTX reported a notable outflow of 37%, with the majority occurring over just two days.

The researchers said BlockFi “appears to have been reduced to a shell of its former size,” as it navigated outflows worth billions during 2022. They identified exposure to Three Arrows Capital as a common factor and source of contagion among the examined firms. 

“They used customers’ funds for illiquid and risky investments (e.g., in 3AC or the Anchor protocol) in attempts to generate the high returns promised to their customers,” they wrote. “In response to negative shocks, customers had an incentive to run in order to avoid taking losses that would be borne by others.”

The study concluded that the collapse of FTX exerted significant strain on Silvergate Bank and Signature Bank, leading to substantial withdrawals of deposits and ultimately resulting in their closure or failure in 2023. These events, coupled with the failure of Silicon Valley Bank, were identified as contributing factors to the recent banking turmoil.

That conclusion is at odds with other analysis. Adrienne A. Harris, superintendent of the New York State Department of Financial Services, testified in a House hearing on digital assets that the failure of Signature Bank was unrelated to its dealings with crypto firms.

The recent failure of First Republic Bank further belies the notion that shakiness in the banking sector is the result of flighty crypto depositors, since that bank had little to none.

Instead, some investors and the public recognize the rapid rise in interest rates by the Federal Reserve as a more significant contributor to the erosion of confidence in banks, particularly those with large exposure to long-term bonds procured during historically low interest rates in recent years.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Templates.png

Research

ZKPs enable efficient offchain transaction processing and validation, resulting in increased throughput and reduced fees. Solana's ZK Compression leverages ZKPs to minimize onchain storage costs, while Sui's zkLogin streamlines user onboarding by replacing complex key management with familiar OAuth credentials.

article-image

“OpenFi” aims to unbundle to take the “account” out of bank account

article-image

And a look into the newest name on the Trump ticket: Sen. JD Vance

article-image

Plus, Imran Khan’s intriguing experiment on the speeds of crypto onramps

article-image

The SEC has signaled a timeline to issuers that could lead to a July 23 launch for the ETH funds, people close to the process told Blockworks

article-image

PayPal has unequivocally made a name for itself as a crypto adopter among fintech giants

article-image

Also, a look into how the highly-debated SAB 121 could end up shaking out for crypto custodians