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Recently, many crypto platforms have banned or limited the withdrawal of funds for their users. They attribute these limitations to the bear market and extreme market conditions. We will look at notable examples of suspension and consider the implications for crypto traders.
CoinLoan, a crypto lending platform, has recently reduced the account withdrawal limit. The users can only withdraw $5,000 per day. The other cryptocurrency player – primary Singapore-based crypto lender Vauld – has suspended all withdrawals, trading, and deposits for 800,000 members. The company is considering restructuring. Its London-based competitor Nexo offered a 100-percent acquisition bid to Vauld. Due to increased fund withdrawals, Estonian-based Crypto lending company CoinLoan has announced it will decrease its daily withdrawal limit from $500,000 to $5,000 per day. On July 1, Voyager temporarily suspended trading, deposits, withdrawals, and loyalty rewards. Coinswitch Kuber and CoinDCX, the leading platforms on the Indian market, have paused withdrawals and deposits.
Binance experienced severe network congestion as users rushed to withdraw Bitcoin in early June. The world’s largest exchange suspended Bitcoin withdrawal for 30 minutes. And Three Arrows Capital, the crypto-focused hedge fund, went into liquidation as it failed to repay $665 million to its creditors. With the hedge fund down, it would be harder for crypto exchanges to allocate funding from investors.
The need to halt withdrawals means that the companies have not been quite so diligent with their assets in the past. It may very well indicate that these businesses are overleveraged and have problems with solvency. Their operating cash flows and equity are not enough to cover a sudden spike in withdrawal claims. Careful observers could have anticipated the coming of crypto winter. Projects specializing in lending should know more about the risk of going into a downward financial spiral. Now they all need restructuring, and customers pay the ultimate price because their funds are locked. It is essential to see the big picture here.
These suspending decisions signal to the community that these platforms have paid too little attention to long-term financial sustainability and focused on expansion at all costs. This is a common problem for many Web3 projects. As we can see, solvency is an important predictor of the continued operations of an exchange. CER.live provides rankings of crypto exchanges by solvency. The score is based on security rating, trust score, total balance amount and structure, and fund insurance. Today, exchanges with the highest ranking on CER.live have not announced any withdrawal limits or bans.
It is possible to argue that suspending or limiting withdrawal is unethical because it violates the rights and expectations of users. Platforms may cite provisions in their Terms and Agreements. The suspension may be a legal thing to do. However, we have to look at the ethical side of things. Those platforms are banning users from retrieving their own money. They are bragging about doing what’s best for the community, while some users have their life savings locked. The community will undoubtedly reevaluate their opinion about platforms that limit or ban withdrawal. While platforms may claim they are doing this to stabilize liquidity and meet obligations in the long-term, such decisions erode customer trust.