Search Continues for Source of TerraUSD Crypto Bank Run

Search Continues for Source of TerraUSD Crypto Bank Run

Cryptocurrency investors are still trying to figure out what led to May’s spectacular meltdown of a pair of digital tokens that were worth more than $40 billion earlier in the month.

Last week, analytics firm Nansen pointed to lending firm


as one of a handful of users that contributed to the collapse of the luna and terraUSD cryptocurrencies. While Celsius disputes the account, the search for information about the cause of the wreckage highlights the opacity of the world of decentralized finance. 

In DeFi, it isn’t easy to understand who provides money for loans, where the money flows or how easy it is to trigger currency meltdowns. This is one reason regulators are concerned about the impact of DeFi on investors and the broader financial system.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

Many investors put their assets in crypto products that offer healthy returns; those services then lend out the funds to others. The value of assets held on DeFi platforms, termed “total value locked,” skyrocketed from $600 million at the beginning of 2020 to a peak of $317 billion on Dec. 26, 2021, according to the website DeFi Llama. It is now down to about $106 billion, falling in tandem with a decline in prices in the overall cryptocurrency market.

The Anchor Protocol was a popular service for terraUSD holders because it offered users a 19.5% interest rate on loaned crypto. But in May, a flood of investors started pulling their money out of Anchor, which ultimately led to the fall of terraUSD and luna. It is unclear who prompted the selling and whether they meant to trigger the collapse.

Nansen’s report argues that Celsius was one of a handful of users that first withdrew hundreds of millions of dollars from Anchor early, possibly triggering the broader selloff on the platform. 

Celsius said that its risk-management group recognized “shifts in the stability” of the platform that prompted it to remove its assets only for the sake of protecting its customers’ money. The company didn’t profit from the instability, it said.

Celsius accepts customers’ deposits and then lends that money out to other users, like exchanges and market makers. It collects a fee for the service and then passes on that revenue to its users as an interest payment. Celsius offers users yields of up to about 14%, so Anchor’s 19.5% yield was attractive to the firm. 

“It’s similar to traditional securities lending,” said

Steven Ehrlich,

the chief executive of

Voyager Digital,

a Canadian-listed company that offers a variety of crypto-focused financial services, some of which offer a stated yield. “It’s almost identical to what happens in the traditional world.”

But these products and services aren’t operated like traditional financial services. 

“It’s being marketed as a better savings account and it’s not,” said Cory Klippsten, chief executive of crypto-services firm Swan Bitcoin.

There are no standards for issues of custody, risk management, or capital reserves. There are no transparency requirements. Investors often don’t know how their money is being handled or who the counterparties are. 

“What you really are doing is, you’re an unsecured lender,” Mr. Klippsten said. “They’re gathering retail loans and investing it out the back end in lightly regulated activities.”

For instance, it wasn’t clear to investors that their money in a Celsius account might have been invested in the Anchor platform. Celsius, Voyager and others in the industry don’t usually disclose their counterparties.

Regulators have increasingly been uneasy about the risks of these lending platforms. In April, Celsius, pressed by regulators, stopped accepting new interest-earning deposits from nonaccredited investors in the U.S. A similar program planned by


was dropped after opposition from U.S. regulators. 

Also, unlike traditional bank accounts, there is no deposit insurance. If a DeFi service collapses or gets hacked—and they are notorious for getting hacked—users are largely on their own.

“In the world of crypto, anyone and their dog can release a product,” said Michael Rosmer, the founder of DeFiYield, which publishes software for auditing DeFi projects. “We discovered very quickly you have this plethora of complex instruments and products, and there’s no vetting.”

Write to Paul Vigna at

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