Celsius bid to compete with Wall Street in crypto lending fell through on risky bets

Celsius Network co-founder Alex Mashinsky was in a defiant mood on Twitter this past weekend. When asked by a user why he has so many enemies, Mashinsky boasted, “Because I win and I give everything to my community.” Days later, his crypto investment firm finds itself in turmoil after blocking customer withdrawals, a move that rocked crypto markets.

The abrupt halt to redemptions underscores the risks for investors who have dived into complex digital investment products that offer high returns. Celsius claimed to have 1.7 million retail customers, including in the US, UK and Israel, and gained a reputation for making aggressive bets with its depositors’ money.

The investment group, which is largely unregulated beyond lending licenses in a handful of U.S. states, had grown to as much as $24 billion in crypto assets under management as of December last year. The firm saw inflows surge shortly after winning investments from Canada’s second-largest pension fund, the Caisse de dépôt et Placement du Québec (CDPQ) and Westcap, a fund led by former Blackstone and Airbnb manager Laurence Tosi.

Celsius presents itself as a simple company that helps everyday investors achieve “financial freedom” unavailable in mainstream finance.

“Crypto marks the first time in history that the average Joe Goldman is ahead of Sachs and Morgan Stanley,” Mashinsky said in a September interview with the Financial Times.

However, Celsius’ woes lie in complex, risky deals typically buried in the bowels of Wall Street.

The group, founded in 2017, rode the recent crypto bull run to become one of the most well-known companies, offering staggering returns of up to 18 percent to clients who have deposited their digital assets. Similar to how a bank counts deposits as liabilities, Celsius customers are unsecured lenders despite not having government-backed insurance on their funds in the lightly regulated crypto world.

Celsius used these deposits in loans to major crypto market makers and hedge funds, as well as in so-called decentralized finance projects. According to people familiar with the matter, several market participants had a policy of not lending to Celsius even if they had borrowed there.

As crypto prices plummeted this year, Celsius has been hit with withdrawals, having drained a total of $2.5 billion from the platform since March. As of May, the company had just $12 billion in assets, half of what it was doing at the start of the year. As a result, it stopped disclosing the total assets under management; However, CDPQ told the FT that Celsius had suffered a “heavy volume of withdrawals” from customers in recent weeks. Celsius did not respond to a request for comment Monday.

The crypto lender had also been challenged by several U.S. state regulators in recent months, who argue that its deposit accounts are unregulated securities. Celsius said in April it had “ongoing discussions with US regulators” and would therefore halt new deposits from US retail investors into its high-yield accounts.

The final push came last week with a severe liquidity mismatch created by Celsius. The company borrowed ether — a major digital token — from users, then locked vast sums of the asset indefinitely in a new version of the cryptocurrency, which is under construction and has experienced delays. Locking Ether in the new version brought in rewards that would eventually be released.

Celsius had locked ether directly, but also through a service called Lido, which issues a derivative of locked ether known as “staked ethereum” or stETH, which aims to be easily tradable and treated as a one-to-one equivalent of ether itself It used this stETH as collateral for further lending, providing $450 million in value to a platform called Aave, according to public blockchain data.

stETH holders sold the derivative last week over concerns about delays in the launch of the new Ethereum network, the main digital ledger on which ether is traded. The sell-off drained liquidity from the main trading pool for the derivative, leaving Celsius unable to exchange its stETH for ordinary Ether to fulfill client withdrawal requests without suffering huge losses, according to crypto analysts.

To make matters worse, the company could be forced to post additional collateral for Aave or have its loans liquidated if stETH’s price falls further.

The group said Monday it would suspend payouts due to “extreme market conditions” and said the decision had been made to put Celsius “in a better position to meet its payout obligations over time.”

The company’s crypto token CEL has fallen to just 30 cents in the wake of the recent troubles. It traded at nearly $8 this past June. The broader crypto market has also been hit by Celsius’ troubles, with Bitcoin down about 25 percent since Friday and trading below $23,000.

Line chart of $ per coin showing the decline in value of the Celsius token

Celsius has managed to pull itself out of previous bottlenecks, all of which have been detailed by a growing group of online critics who have been warning of the risks Celsius was taking for months. Among them were an American blogger, CJ Block, who writes under the pseudonym Mike Burgersburg, and a bitcoin entrepreneur, Cory Klippsten.

“They invested their money in all kinds of risky bets. . . at best, they were like a hedge fund using private money,” said Block, who recently graduated from medical school after spending months analyzing Celsius positions using blockchain data.

In May, Celsius pulled $500 million from the Terra ecosystem just before it collapsed, contributing to the outlet rush that brought down the Terra stablecoin and its associated Luna token. The company had a tougher time last year when it lost 900 bitcoin it had deposited with a crypto venture called Badger DAO, which was then hacked. Celsius was also the holder of large amounts of stETH issued by another company, StakeHound, which became virtually worthless when StakeHound lost the keys to the underlying ether.

Max Boonen, founder of crypto broker B2C2, compared crypto lenders to banks, which must carefully match their assets and liabilities to stay solvent.

“Banks have learned from past crises and are now dealing with their asset-liability mismatches quite carefully and in a differentiated manner. It’s a skillset and I don’t know how far the crypto lending market has learned it,” he said.

Additional reporting by Josephine Cumbo

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