Crypto crash is a wake-up call for the deluded
Investors who exchanged their cash for ‘coins’ were swapping one financial gatekeeper for another – and look how that’s paid off
Cryptocurrency was meant to replace our giant financial institutions. So why, then, does it seem so vulnerable to a good old-fashioned bank run? Last month, an investor panic knocked almost $200bn (£165bn) off the value of Bitcoin and other crypto coins when the (so-called) stablecoin Terra collapsed, a sell-off that was likened to the Black Wednesday ERM crisis of 1992. And in recent days, cryptocurrency prices have fallen to an 18-month low.
The latest sell-off has been sparked by the crypto companies Celsius and Binance blocking users from withdrawing their Bitcoin.
The blocks have provoked fury among customers. If Celsius and Binance had high street branches, there would have been hordes of crypto owners lined up outside them yesterday morning, pounding on the doors and demanding their money back.
It wasn’t supposed to be like this. Bitcoin was invented in the depths of the financial crisis, when billions in taxpayer money had been spent bailing out RBS and Lloyds, and public anger at banks was at a peak.
Satoshi Nakamoto, its pseudonymous inventor, characterised the cryptocurrency as a way for payments “to be sent directly from one party to another without going through a financial institution”, taking power away from big banks and back to the people.
Many of Bitcoin’s most idealistic supporters purport to carry this flame. They characterise cryptocurrency as a way for individuals to avoid the tentacles of the state, the eyes of privacy eroding technology companies and the whims of inflation-happy dictators.
In theory, Bitcoin means that an internet connection, a smartphone and a password is all that you need for financial freedom, impervious to despots or hackers.
It is why cryptocurrency is often characterised as a revolution on a par with the internet, doing for money what the latter did for information.
Recent events have exploded that illusion, however. Celsius, which had raised hundreds of millions from serious backers, operated somewhat like a crypto lender, taking customer deposits in Bitcoin and lending it back out for a fee.
More than 1.7m users signed up, tempted by the promise of interest rates of up to 19pc, and it boasted of billions in assets.
But on Sunday night the company suddenly blocked customers from withdrawing their Bitcoin savings, blaming “extreme market conditions”.
Yesterday, the deposits of these same customers still remained frozen.
While one could argue that Celsius was a bit-part player in a much wider ecosystem, the same could not be said for Binance. The company is the world’s biggest cryptocurrency exchange, processing tens of billions in transactions a day.
Binance cited a “stuck transaction” on Monday when it suspended Bitcoin withdrawals for several hours, but the news was enough to send the market into a tailspin.
Bitcoin fell from $27,000 (£22,481) to less than $21,000 yesterday, and has lost more than half of its value this year.
While the freezes were bad news for Bitcoin investors that are already suffering a historic downturn, they also expose a contradiction at the heart of the cryptocurrency world.
For all the industry’s promises of decentralising finance, those who have exchanged their cash for crypto have done little more than put their faith in one financial gatekeeper over another.
Binance and Celsius customers’ savings were no more free for being in Bitcoin. They were still subject to the whims of an intermediary with the power to shut its doors and cut off users, just as they would be with a bank.
The key difference is that if a cryptocurrency company goes bust, there is no regulation protecting deposits.
Yes, Bitcoin technically operates independently of any institution or country, governed only by computer code and the network of “miners” that maintain it. This is why, strictly, it can never be regulated.
You can download your Bitcoin on to a hard drive and truly own it.but most people don’t: it is not worth the hassle or the risk.
Instead, they store their cryptocurrencies in an online exchange where it can be easily withdrawn and liquidated.
Convenience wins the day over idealism, and as the current crop of Silicon Valley monopolies has shown, consumers drift towards centralisation. Once it sits in an exchange where it can be converted, Bitcoin must interact with the rest of the financial system, making it subject to regulation.
Coinbase, one of the world’s biggest exchanges, deals with hundreds of law enforcement requests a week.
Those operating in Britain are regulated by the Financial Conduct Authority. Criminals are finding it increasingly difficult to convert stolen crypto into cash, because it is often seized when it enters an exchange.
As cryptocurrency companies come under closer scrutiny, they will start looking less representative of the libertarian ideal on which Bitcoin was founded and more like the ageing banks it was meant to replace.
At that point, we might start to wonder where its value comes from. If a couple of companies have the power to crash the entire market, Bitcoin does not look so free after all.
‘Binance and Celsius customers’ savings were no more free for being in Bitcoin’