Crypto exchanges are freezing withdrawals; here's why

“Crypto markets have seen a correction due to multiple macro factors. The inflation rate globally has also been a significant concern as the US is at a 40-year high at 8.6 percent and in the UK at 9 percent. In addition, interest rate hikes across major crypto nations are also a growing concern as they lessen liquidity. Both the indicators have led to a massive sell-off,” said Nischal Shetty, founder & CEO at WazirX, India's Largest cryptocurrency exchange to CNBC TV 18.

As mass liquidation adds salt to the wounds of a bleeding crypto market, exchanges face a liquidity crisis. The exodus of investors is causing the coffers of crypto firms to run dry. And to prevent further selloffs, most exchanges and trading platforms are compelled to terminate withdrawals.

“Exchanges don’t have liquid cash even to a fraction of the supposed value of cryptocurrencies, which they hold in their digital wallets on behalf of investors,” said former Finance Secretary of India and crypto expert S. C. Garg to the Outlook in mid-June when conversing about the issues plaguing exchanges. “As the exchanges cannot liquidate their holdings even at their depreciated values, they are trapped,” he added.

On June 13, global crypto lender Celsius stopped all withdrawals across its network, freezing $12 billion in investor money through the move. “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations,” read the official announcement.

The next one to succumb to the crypto rout was staking platform Finblox, which restricted the monthly withdrawal limit to a mere $1,500 on June 16, 2022. The firm found itself on a slippery slope as it was connected to 3AC, which is fighting against impending insolvency after the Terra UST was reduced to rubble last month.

Soon after the Celsius debacle, on June 17, 2022, Babel Finance also froze all further withdrawals on its network as it was “facing unusual liquidity pressures.” According to Coindesk, Babel was knee-deep in debt with an outstanding debt of $3 billion, while its valuation stood at $2 billion after a recent round of funding.

The pressure on trading platforms continued to mount as another firm exposed to 3AC, Voyager Digital, slammed the brakes on its withdrawals. It slashed the daily withdrawal limits by more than 50 percent, from $25,000 to $10,000. The platform had a massive exposure of $661 million to the near-bankrupt 3AC, which failed to repay even a penny, pushing Voyager to the brink of destruction.

“A lot of crypto exchanges keep some Bitcoin or rupee in their reserves or their cold wallets for long-term storage, and you know it’s like they keep circulating the same cryptos with new users. But whenever there is a situation like this where people want to withdraw their crypto all at once, it takes a toll on the entire matching system. Also, another reason is that right now, the exchanges just have 2.4 million Bitcoins out of 19 million in circulation. So, this clearly indicates that the exchanges are running dry,” explained Sidharth Sogani, CEO of crypto data provider CREBACO Global, to the Outlook in mid-June.