The crypto industry fears a regulatory backlash over the credit crunch

A collapse could leave these depositors penniless.

The company’s balance sheet has been in freefall since late last year, shortly thereafter Raised $750 million by top venture capital firms and a major Canadian pension system, with reported assets down 50 percent since late December. Celsius digital token, CEL, has also deteriorated in price, from trading just under $4 at the end of 2021 to just 0.32 cents now. Another competitor has already done so offered to create certain assets given Celsius’ apparent bankruptcy.

Crypto companies are already on high alert after weeks of uncertainty in a market downturn that has seen the entire market down by two-thirds since its $3 trillion peak in early November. Crypto markets are also reeling from the recent collapse of TerraUSD, a so-called stablecoin whose popularity has skyrocketed thanks to sky-high yields promised by a related lending platform. Celsius’ fall has done little to help the market turmoil as Bitcoin’s price has fallen further to around $22,000 — a far cry from its November high of $67,000.

The ongoing crisis has sparked fresh fears that market regulators could thwart the burgeoning crypto lending businesses that have positioned themselves as an alternative to traditional banks.

“I’m quite angry at how inconsiderate[ly] Celsius runs their business,” Crypto Finance CEO Patrick Heusser said in an email, citing the company’s promises of high returns. “My guess is that rather strong or overreacting action by regulators will result (rather than thoughtful one).”

“In the end, the consumer will be penalized (again) and so will any reputable service providers who act prudently and compliantly and regulatedly,” he added.

Heusser is far from alone. At an Amsterdam fintech conference last week, attendees working for crypto companies whispered concerns about Celsius and feared a regulatory backlash. Among the few who wanted to speak publicly about it was Stephen Richardson, vice president of product strategy and business solutions at crypto company Fireblocks.

Regulators would address a crypto lending crisis “very quickly,” he told the audience, especially after the recent crisis in the stablecoin market caused investors to lose billions. “We have to be careful,” he said.

Celsius did not contact POLITICO for comment.

A watchful eye

Market volatility is nothing new for most crypto companies. This time, however, is different as regulators on both sides of the Atlantic are watching – and overall market sentiment is much more bearish.

For more than a year, US state and federal agencies have intensified efforts to settle the lending business, which is more widespread in the US over allegations that it engaged in an illegal lending business, while Celsius and other companies have been slapped with cease-and-desist letters from at least four state regulators .

“To me, that’s amazing,” John Reed Stark, a former head of the SEC’s Office of Internet Enforcement, said in an interview, adding that lending platforms “have become a plague with no regulatory oversight and no consumer protections. No fiduciary infrastructure of any kind.”

The EU executive and lawmakers in Brussels are also keeping an eye on things as they move closer to a new bill aimed at regulating Europe’s markets for crypto assets called MiCA.

The bill will set the standard for stablecoins, digital assets pegged to either a local currency or a basket of liquid assets to keep their value constant. The recent collapse of TerraUSD has bolstered lawmakers’ resolve for these rules, especially as the “algorithmic” stablecoin relied on financial engineering to maintain its link to the greenback.

MiCA is not aimed at crypto lending. But it sets strict industry standards and oversight for companies issuing crypto tokens settling in Europe after the rules come into effect. The Celsius crisis shows the need to strengthen these draft rules to ensure existing crypto companies also fall under the scope, according to Green MEP Ernest Urtasun.

“Abuse scandals are on the rise in the crypto sector, while consumer and investor protection rules for [retail investors] not adequately addressing the reality of this new sector,” said the Spaniard, who has played an influential role in negotiating MiCA and anti-money laundering rules for crypto in the European Parliament.

He also targeted a grandfathering clause in the European Commission’s MiCA proposal that “would prevent the application of the new EU rulebook to actors already in place”. This measure would theoretically exempt Celsius from MiCA since the lender already has an office in Lithuania. “Cases like Celsius show once again the need to abolish such regulations,” he said.

collateral damage

The biggest concern of market entrepreneurs is that regulators could restrict or ban crypto lending altogether. While the EU does not have uniform rules on lending outside of mortgage and loan lending, there are fears that the European Commission may feel compelled to shut down the sector. This is unlikely to happen in the remainder of the legislative cycle, which ends in 2024, unless the crisis is too big to ignore.

Certain lenders like Celsius — posing as a bridge between traditional banking models and crypto-based decentralized finance — have lured retail investors onto their platform by touting high returns if they deposit their crypto assets with them. Like traditional banks, these platforms lend these funds to borrowers against collateral that is confiscated if loans are not repaid.

Many of these loans are used by large crypto investors to buy more digital assets as their interest rates are much lower than they would otherwise be in traditional financial markets. This strategy can bring huge returns to crypto investments during boom times. However, the losses can be massive if the market turns sour.

Like its peers in the industry, Celsius uses its deposits to make loans and takes advantage of the interest rate differential.

But authorities in New Jersey and Texas have found that the platform also generates revenue “through cryptocurrency trading, lending and borrowing” and “proprietary trading” — the practice of investing for direct market gain rather than on behalf of clients. Their concern is that these practices have left Celsius overexposed and its inserts stuck.

“We are now seeing the negative impact of unregulated … lending platforms that are undercollateralized” in the crypto market, said Marshall Hayner, chief executive of Metal Pay, a US-based crypto payments company.

Hayner worries that the regulator’s ax would also hit crypto lenders in the decentralized finance space, where computer programs execute transactions and record them in multiple online ledgers without the use of a central authority.

DeFi borrowers are often required to post collateral worth more than the loan they are seeking from a syndicate of crypto investors — similar to peer-to-peer lending.

“It’s important that we protect crypto innovation in America while maintaining the safeguards we expect in banking and traditional financial services,” Hayner said. “A good move is a strong framework for stablecoin regulation that is not reactionary but thoughtful and pro-competitive.”

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