How Celsius’ fall dragged down crypto investors
Celsius’ petition for bankruptcy this week surprised virtually no one. When a platform freezes customer funds, it’s usually over. But just because the fall of this difficult crypto-lender did not come as a shock does not mean that it was not a very big deal for the industry.
In October 2021, CEO Alex Mashinsky said the cryptocurrency lender had $ 25 billion in assets under management. Even as recently as May – despite the crash in cryptocurrency prices – the lender managed around $ 11.8 billion in assets, according to the website. The company had an additional $ 8 billion in client loans, making it one of the world’s biggest names in cryptocurrency.
Celsius is now down to $ 167 million “in cash on hand”, which it says will provide “ample liquidity” to support operations during the restructuring process.
Meanwhile, Celsius owes its users around $ 4.7 billion, according to bankruptcy records – and there is a gap of about $ 1.2 billion in the balance sheet.
It shows that influence is a hell of a substance, but the moment you suck out all that liquidity, it’s much harder to keep the party going.
Celsius’ fall marks the third major bankruptcy in the crypto ecosystem in two weeks, and it’s billed as the crypto’s Lehman Brothers moment – comparing the contagious effect of a failed crypto borrower to the fall of a major Wall Street bank that eventually predicted the 2008 mortgage debt and financial crisis.
Regardless of whether the Celsius implosion heralds a major collapse of the larger crypto ecosystem, the days for customers who collect double-digit annual returns are over. For Celsius, promising the big returns as a means of bringing in new users is a big part of what led to the ultimate downfall.
“They subsidized it and took losses to get customers in the door,” said Castle Island Ventures Nic Carter. “The returns at the other end were false and subsidized. Basically, they got returns from [Ponzi schemes]. “
Who will get the money back
Three weeks after Celsius stopped all withdrawals due to “extreme market conditions” – and a few days before the cryptocurrency lender finally filed for bankruptcy – the platform continued to advertise in bold text on the site its annual return of almost 19%, which paid out weekly.
“Transfer your crypto to Celsius and you could earn up to 18.63% APY in minutes,” the website read July 3.
Promises like these helped to attract new users quickly. Celsius said it had 1.7 million customers as of June.
The company’s bankruptcy report shows that Celsius also has more than 100,000 creditors, some of whom borrowed the platform cash without security to back up the scheme. The list of the 50 best unsecured creditors includes Sam Bankman-Peace’s trading company Alameda Research, as well as an investment company based in the Cayman Islands.
These creditors are probably first in line to get their money back, should there be anything to take – with mom and pop investors left with the bag.
After filing for bankruptcy, Celsius clarified that “most of the account activity will be suspended for the time being” and that there was no “requesting authority to allow withdrawals at this time.”
Frequently asked questions go on to say that reward earnings are also stopped through the Chapter 11 bankruptcy process, and customers will not receive reward distributions at this time.
This means that customers trying to access their crypto money are unlucky so far. It is also unclear whether bankruptcy proceedings will ultimately enable customers to recover their losses. If there is some sort of payout at the end of what could be a multi-year process, it is also the question of who will be first in line to get it.
Unlike the traditional banking system, which usually insures customer deposits, there is no formal consumer protection in place to secure user funds when things go wrong.
Celsius specifies in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. Because no collateral was provided by Celsius, customer funds were mainly just unsecured loans for the platform.
Also in the fine print of Celsius’ terms and conditions is a warning that in the event of bankruptcy, “all Qualified digital assets used in the Service or as collateral under the loan service may not be recovered” and that customers “may not have any legal remedies or rights in connection with Celsius’ obligations. ” The revelation sounds like an attempt at general immunity from legal misconduct, should things ever go south.
Another popular lending platform aimed at retail investors with high-yield offers is Voyager Digital, which has 3.5 million customers and recently filed for bankruptcy.
To reassure its millions of users, Voyager CEO Stephen Ehrlich tweeted it after the company goes through bankruptcy proceedings, users with crypto in their account will potentially be eligible for some sort of package of things, including a combination of crypto in their account, regular shares in the reorganized Voyager, Voyager tokens, and then whatever revenue they is able to obtain from the company’s now defunct loan to the once prominent crypto hedge fund Three Arrows Capital.
It is unclear what the Voyager token will actually be worth, or whether any of this will come together in the end.
Three Arrows Capital is the third major crypto player to seek bankruptcy protection in a US federal courtroom, in a trend that can not help asking the question: Will bankruptcy law ultimately be the place where a new precedent in the crypto sector is set, in a way of regulating -ruling-model?
Lawmakers on Capitol Hill are already looking to establish more ground rules.
Sens. Cynthia Lummis, R-Wyo., And Kirsten Gillibrand, DN.Y., aim to clarify a bill that sets out a comprehensive framework for regulating the crypto industry and divides supervision among regulators such as the Securities and Exchange Commission and Commodity Futures Trading Commission.
What went wrong
Celsius’ overall problem is that the almost 20% APY it offered customers were not genuine.
Celsius also invested its funds in other platforms with similar sky-high returns, to keep the business model afloat.
A report by The Block found that Celsius had invested at least half a billion dollars in Anchor, which was the flagship lending platform for the now unsuccessful US dollar-fixed stablecoin project terraUSD (UST). Anchor promised investors an annual return of 20% on their UST holdings – a rate many analysts said was unsustainable.
Celsius was one of several platforms to park its money at Anchor, which is a big part of why the cascade of big mistakes was so significant and rapid after the UST project imploded in May.
“They always have to get returns, so they move their assets around to risky instruments that are impossible to hedge,” said Nik Bhatia, founder of The Bitcoin Layer and assistant professor of finance at the University of Southern California.
As for the $ 1.2 billion gap in the balance sheet, Bhatia takes it up to poor risk models and the fact that collateral was sold out under it by institutional lenders.
“They probably lost customer deposits in UST,” Bhatia added. “When assets go down in price, that’s how you get a ‘hole’. The responsibility remains, then again, bad risk models. “
Celsius is not alone. Cracks are constantly forming in the lending corner of the crypto market. Castle Island Ventures Carter says that the net effect of all this is that credit is destroyed and withdrawn, insurance standards are tightened, and solvency is tested, so everyone draws liquidity from crypto borrowers.
“This has the effect of increasing returns, as credit becomes more scarce,” said Carter, noting that we are already seeing this happen.
Carter expects to see general inflation sharing in the US and elsewhere, which he says only further makes the case for stack coins, which are relatively hard money, and bitcoin, which is really hard money.
“But the part of the industry that relies on the issuance of junk tokens will be forced to change,” he said. “So I expect the result to be heterogeneous across the crypto area, depending on the specific sector.”
