CRYPTO • Starting with TerraUSD in the spring, there has been a ripple effect
C1 1. Terraform Labs
The Singapore-based company created TerraUSD — a cryptocurrency algorithmically pegged to the U.S. dollar — along with an associated token called Luna. By parking Terra on an affiliated platform called Anchor, investors were promised nearly 20 percent returns on their investments.
But this past May, TerraUSD plummeted amid a mass sell-off of the tokens. That crash spread through the crypto market, erasing about $500 billion in value in two weeks, along with the portfolios of ordinary people lured in by the high gains.
The crash prompted financial watchdogs to focus attention on the industry, as well as proposals to regulate stablecoins like TerraUSD. It also set off a chain reaction that saw the downfall of crypto lenders Voyager Digital and Celsius Network, and hedge fund Three Arrows Capital, plunging the industry into further turmoil.
Do Kwon, the South Korean co-founder of Terraform Labs, appears to be on the run, according to multiple news reports, as South Korean prosecutors have issued a warrant for his arrest. But even after the destruction was clear, Terraform Labs introduced a new cryptocurrency, with Kwon calling it a “chance to rise up anew from the ashes.” The new coin is still available.
2. Celsius Network
In October 2021, Celsius raised $400 million in an investment round and at its pinnacle had amassed some $20 billion in assets. Soon after the TerraUSD crash, Celsius Network in July filed for bankruptcy. For years, the cryptocurrency lender offered astronomically high yields — as much as 30 percent — to consumers who deposited bitcoin and other digital coins. Celsius would then lend the deposited coins at high interest rates to investors looking to make short-term investments.
While it acted much like a bank — albeit offering higher interest rates on customer deposits — accounts were not federally insured. Nor was it required to demonstrate it had sufficient assets to pay back investors if they demanded their money. State regulators took notice, with officials in Alabama and New Jersey accusing Celsius of selling unregistered securities.
In June, as the broader cryptocurrency market remained rattled by the fall of TerraUSD, Celsius halted withdrawals to hundreds of thousands of accounts, citing “extreme market conditions.” The news sent cryptocurrency prices tumbling. A month later, Celsius filed for bankruptcy, prompting fears depositors would never get their money back. Some researchers said that Celsius’ investment activities may have contributed to fall of TerraUSD, highlighting the interconnectedness of the industry.
3. Voyager Digital and Three Arrows Capital
Like Celsius, cryptocurrency lender and broker Voyager Digital offered high returns on their retail accounts. Voyager also worked with large institutional investors — like hedge fund Three Arrows Capital, which borrowed some $665 million from Voyager. The Singapore-based Three Arrows, headed up by investors Su Zhu and Kyle Davies, used the loans, like the one from
Voyager, to make highly risky bets, all on the assumption that crypto prices would keep going up, as Bloomberg reported in July.
But as the collapse of TerraUSD and Luna rippled through the broader crypto market, Three Arrows’ investments turned south. It filed for bankruptcy in July, went into liquidation and defaulted on its loan to Voyager. Soon after, Voyager suspended customer withdrawals and itself filed for bankruptcy. According to bankruptcy filings, Voyager had more than 100,000 creditors and listed assets and liabilities of between $1 billion and $10 billion.
That month, FTX, which had been snapping up distressed crypto companies, offered to bail out Voyager — an offer that was rejected, according to Reuters. But in September, FTX purchased
the company at auction for $1.4 billion and was slated to acquire it. Now that FTX has entered its own bankruptcy proceedings, Binance — the FTX rival that helped touch off its collapse — may make its own bid for Voyager, Binance’s leader Changpeng Zhao told Bloomberg in November.
4. BlockFi
The cryptocurrency bank faced collapse as the market tumbled this summer. But Bankman-Fried, FTX’s founder, lined up a $400 million bailout to stabilize it. When FTX crumbled in November, BlockFi paused customer withdrawals and later said it had “significant exposure to FTX and associated corporate entities,” including money it had tied up in the exchange and Bankman-Fried’s trading firm Alameda Research.
Shortly after, BlockFi filed for bankruptcy, listing at least 100,000 creditors and liabilities between $1 billion and $10 billion. One of those creditors is the Securities and Exchange Commission, to which BlockFi in February agreed to pay a $50 million fine over charges that it violated securities laws and made false statements about its business. BlockFi also agreed to pay $50 million to 32 states. Like Celsius and Voyager, BlockFi offered cryptocurrency accounts that promised high returns to everyday investors.
5. FTX
FTX stands apart because, unlike Voyager and Celsius, it is the first major cryptocurrency exchange to topple. Founded in 2019, FTX evolved into a marketplace where, in addition to cryptocurrencies, retail investors could trade cryptocurrency derivatives — complex financial instruments used to make bets on price swings. The company also offered accounts that promised high yields. During a funding round in January, it was valued at $32 billion. Bankman-Fried, meanwhile, donated to Democratic lawmakers and courted regulators as he pushed regulations that would have largely benefited his business.
But, in November, CoinDesk published a report showing that BankmanFried’s trading firm, Alameda Research, had an outsize number of an FTX-issued cryptocurrency on its books. Days later, Zhao, the Binance CEO, said he’d sell roughly $530 million of the coin, FTT. Panic ensued and FTT prices plunged, sparking an investor run on FTX. The exchange froze withdrawals and, soon after, filed for bankruptcy.
The cause of FTX’s fall is still being untangled. But The Wall Street Journal reported that FTX loaned customer funds to Alameda Research to fund its risky bets. In an hourlong live interview with New York Times columnist Andrew Ross Sorkin last week, Bankman-Fried said he “didn’t knowingly commingle funds.”
Prosecutors and regulators are nonetheless probing the collapse, and BankmanFried — along with a list of celebrities who endorsed FTX — are facing a class-action lawsuit in Florida.
“Look, I screwed up. I was the CEO of FTX,” BankmanFried told Sorkin. “I say this again and again. That means I had a responsibility. We messed up big.”