By Ben Samaroo, CEO and Co-Founder
With the crypto liquidity crisis in full swing, many crypto users and investors are left wondering which other companies have over-exposed themselves and are at risk of facing liquidity issues or insolvency.
For WonderFi and its subsidiaries Bitbuy and Coinberry, the short answer is NO – we don’t use leverage or put customer deposits at risk.
Liquidity issues affecting platforms like Voyager, Celsius, and BlockFi are the result of using leverage, and lending out client assets to generate yield.
Leverage can be useful. It can aid in efficient capital allocation and provide outsized returns if used prudently.
But there is a dark side to leverage - and it arises during periods of extreme stress. Leverage is one common element that precipitates any extraordinary decline in financial markets, be it crypto, housing, equities, or commodities. Eventually, when the market turns sour, investors who are overexposed due to leverage, are forced to begin selling their assets to prevent insolvency. Forced selling typically results in selling at a loss, which drives prices lower, creating a negative feedback loop, which results in further forced selling.
Celsius, Voyager, and BlockFi each operate a business model that resembled a bank. They take customer deposits, and lend these funds out to various borrowers, returning their depositors a portion of the yield they received from these lending activities.
The problem was that they promised high returns on volatile assets. In a very competitive landscape, these platforms were offering unsustainably high yields to attract clients, which in turn put client assets in significant risk that was in most cases not properly disclosed. To generate those returns they were forced to enter into risky loans, with questionable counter parties, that over extended themselves.
This resulted in both Voyager and Celsius suspending client withdrawals and facing potential bankruptcy, while Voyager was forced to file for Chapter 11 bankruptcy. Voyager has now been suspended from trading on the TSX and is facing delisting.
This crisis is another step in the evolution of the crypto landscape – it goes without saying it will create a serious dent in the confidence of crypto, and rightfully so as the hard-earned cash of many people has been lost without meaningful recourse. The next step will be further regulation to prevent companies from putting user funds at risk like this in the future without proper disclosure. With time, this will create more confidence in the industry and the asset class.
WonderFi, Bitbuy and Coinberry do not offer, use, orin any way access leverage. We don’t have any debt, nor have we ever lent out client assets.
As a requirement of our regulatory licenses, Bitbuy and Coinberry hold all customer assets with licensed, qualified custodians, in a secure and insured environment.
This is one of the keys benefits of operating licensed, regulated crypto trading platforms like Bitbuy and Coinberry. We are not permitted to put customer assets at risk through lending.
Any products that we bring to market must first be assessed and approved by securities regulators prior to launch. This process is onerous, and ensures that all counterparty risk, client disclosures, and operational nuances have been outlined in detail, and approved by securities regulators.
This means we must perform rigorous risk analysis and present our findings to regulators to obtain approval before we offer any new products to our users. Regulators have to get comfortable that the key risks to users and investors are adequately addressed before we launch a new product.
Separately, the WonderFi DeFi app is entirely non-custodial, so the only party with access to and control of assets is the customer themself.
The regulator that governs Bitbuy and Coinberry, the Ontario Securities Commission, is the Canadian equivalent of the SEC and has a mandate of protecting investors. The platforms that are front and center of the crypto liquidity crisis were not licensed by the OSC or the SEC. We believe it is critical for Canadians looking to access digital assets, to work with a licensed platform.
Since WonderFi is a publicly traded company, we have additional financial reporting requirements and other disclosure requirements. As a user or a shareholder of WonderFi, you can review our public financial statements and verify that what I’m saying is correct – that we don’t use leverage, or lend out our customer assets.
WonderFi, Bitbuy and Coinberry will always put customer safety and security first, and that goes hand in hand with a sustainable business model that isn’t predicated on high-risk products or leverage. We have always operated with a long-term view on the industry, and will never alter that for short-term revenue opportunities.
We believe that providing users with safe, easy and compliant products will drive value for our users and stakeholders for years to come and will contribute to the growth of this industry.