A recent study has discovered that the 2022 crypto bank runs were predominantly triggered 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 withdrew a significant portion of their funds compared to other customer groups, with about 35% of withdrawals originating from account holders with over $1 million in investments.
The study also observed that crypto platforms faced run risks as they allowed customers to withdraw funds at will while using those funds for risky and illiquid investments, aiming to fulfill promised high investment returns. A notable example of such instability occurred when FTX experienced a rapid withdrawal of 25% of customer investments within a single day.
These episodes constituted a classic financial crisis in a novel setting, raising urgent policy concerns. The study examined customer fund outflows from BlockFi, Celsius, FTX, Genesis, and Voyager, focusing on the breakdown of large account withdrawals specifically in Celsius’s case.
Celsius and Voyager experienced significant outflows of 20% and 14% of customer funds within 11 days following the collapse of the TerraUSD stablecoin. BlockFi saw estimated outflows of $3.3 billion between June and November 2022, while FTX reported a notable outflow of 37%, with the majority occurring over just two days. The researchers said BlockFi was reduced to a shell of its former size as it navigated these outflows.
Exposure to Three Arrows Capital was identified as a common factor and source of contagion among the examined firms, as they used customers’ funds for illiquid and risky investments to generate high returns, creating an incentive from customers to run in response to negative shocks.
The study concluded that FTX’s collapse exerted significant strain on Silvergate Bank and Signature Bank, resulting in substantial deposit withdrawals and ultimately causing their failure in 2023. These events, coupled with Silicon Valley Bank’s failure, contributed to recent banking turmoil. However, Adrienne A. Harris, superintendent of the New York State Department of Financial Services, testified that Signature Bank’s failure was unrelated to its crypto dealings.
Some investors and the public view the Federal Reserve’s rapid interest rate hikes as a more significant contributor to eroding confidence in banks, especially those with large exposure to long-term bonds procured during historically low-interest rates in recent years.
Source: Blockworks
