Why Celsius and Voyager Were More Like Uninsured, Quasi-Banks
William D. O'Connell, PhD Candidate, Political Science, the University of Toronto. ______
There is a well-known saying shared by both crypto experts and skeptics: “Not your keys, not your coins.” The phrase, popularized by Bitcoin entrepreneur Andreas Antonopoulos, refers to how the contents of a crypto wallet are the property of whoever has access to that wallet’s digital “keys.”
Of course, offline storage requires an extra level of understanding, technological sophistication, and inconvenience. Enter crypto exchanges like Coinbase and Crypto.com, which offer simple, convenient platforms for users to buy and sell cryptocurrencies and NFTs.
However, the crypto crash has revealed that these firms are not just exchanges — they are more like banks. Except defunct crypto exchanges like Celsius Network and Voyager Digital were only banks if you read the fine print. Most customers, of course, did not.
Crypto exchange companies market themselves as platforms for users to buy and sell crypto. But they also function like stockbrokers and, more concerningly, their core business models quite closely resemble banking.
Traditional exchanges, like the New York Stock Exchange, rarely go bankrupt. And since they do not offer account services, if they do go bankrupt their clients are not on the hook for any losses. Brokerage firms, like Wealthsimple, do sometimes go bankrupt, but their clients’ portfolios are held in the client’s own name and, accordingly, may simply be transferred to a different broker. In the event of fraud, both Canada and the United States provide automatic insurance for lost assets.
Banks, like the Royal Bank of Canada, take on more risks and fail more often. Because banks use customer deposits to make loans, banks are vulnerable to runs. This is why most high-income countries — including Canada — have deposit insurance and regulate banking more than other financial services.
In companies like Celsius and Voyager, customers’ accounts were not held separately in their own wallets, but rather held in a pool owned by the platform. The platform would use this pool of money to make loans (often to other crypto firms) or to engage in its own speculative investing (often in crypto assets). When depositors cashed out, they were paid from the pool, which was able to cover normal on-demand withdrawals, but did not have enough cash to handle everyone pulling out simultaneously.
Cryptoassets themselves should be clearly designated as securities, and therefore subject to oversight. Exchange platforms should be required to hold sufficient cash in government-issued currency. If this sounds like it violates the ethos of decentralized finance, that’s because it should.
The macro level is trickier. Post-2008, we have demonized the big banks and fetishized technology. Crypto enthusiasts claim Wall Street is only in it for itself, and they are right. But they’ve recreated the same system, only it’s even riskier.
Rebuilding that trust takes time and energy. It takes a willingness to deal with the inequities caused by a rising cost of living and an extractive financial system. And, crucially, it takes effective regulation. If it looks like a bank and behaves like a bank, it needs to be treated like a bank.