Wednesday, September 27, 2023

DeFi loan giant Celsius stops withdrawals

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The Celsius Network, a decentralized financing platform (DeFi) and one of the largest cryptocurrency lenders, announced Sunday night it “paused all withdrawals, swaps and transfers between accounts.” It has 1.7 million customers.

The company’s token, CEL, is trading at 23 cents at the time of writing, according to CoinMarketCap† That’s a 92 percent drop from April 8, when CEL was worth $3. The token was worth almost $7 a year ago.

There have been questions about the high yields of Celsius Networks, its connections to the failed stablecoin Terra and its reserves. The value of assets on its platform fell by half to $12 billion in May, from $24 billion in December 2021. Between March and May, $1 billion flowed out of the system, The Financial Times reported

In a June 7 blog post titled “Damn the torpedoes,” the company said, “Celsius has the reserves (and more than enough ETH) to meet obligations as dictated by our comprehensive liquidity risk management framework.”

That was then. On June 12, an email to all customers began as follows:

Due to extreme market conditions, we are announcing today that Celsius is pausing all withdrawals, swaps and transfers between accounts. We are taking this action today to put Celsius in a better position to meet its withdrawal obligations over time.

In theory, Celsius works in much the same way as a regular bank, except in cryptocurrency. It collects deposits and then lends them out. A ad on the Celsius site at the time of writing, it offered an 18.63 percent annual return on crypto deposits. Unlike a sofa, Celsius has no FDIC government insurance that protects people in the event of a bank failure.

Skeptics have repeatedly warned that Celsius Network is doomed to failure. Some have even claimed that Celsius is a Ponzi scheme

Due to its size, Celsius touches many other parts of cryptocurrency markets. For example, Celsius Network borrowed $500 million from Tether, the dollar-pegged stablecoin. (The loan was originally $1 billion, Bloomberg reported:.) The loan is secured in Bitcoin. “If Bitcoin goes down, they give us a margin call [and then] we need to give them more Bitcoin,” said Celsius CEO Alex Mashinsky told The Financial Times last year

Even investors not directly involved in cryptocurrency have exposure to Celsius. Canada’s second largest pension fund, Caisse de Dépôt et Placement du Québec (CDPQ), invested as part of a $400 million equity round for the company.

Regulators have expressed interest in Celsius Network’s activities. On September 17, 2021 aloneNew Jersey has banned Celsius Network, Texas has scheduled a hearing to determine whether it should issue a ban, and Alabama asked Celsius why it shouldn’t be banned within a month. In October 2021, New York Attorney General Letitia James included the company as one of the platforms requested information about its activities and productsand Celsius said it was working with regulators in the state.

There is more. The Celsius CFO Arrested in Israel in November on suspicion of money laundering, fraud and sexual assault. (Those allegations were about his conduct at his previous job; he was… suspended at Celsius after the arrest.) When the DeFi platform BadgerDAO was hacked in December, blockchain activity showed that Celsius network lost $54 million in crypto. Celsius claimed customer and user assets were not affected

In his comment to his customers, Celsius said the company’s “ultimate goal is to stabilize liquidity.” It did not give a date on which customers could expect to withdraw again, warning that “this process will take time and delays may occur.”

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