Cryptocurrency trading platform Celsius has demonstrated clearly that the fears of many institutional investors about the cryptocurrency market’s infrastructure are justified. This was also something the SEC had been focusing on in its deliberations around whether cryptocurrency markets required more regulation. Ultimately much of the existing crypto market ‘nuts and bolts’ has been built by tech specialists rather than financial market professionals. This seems to be where it is coming unstuck.
#1. What has happened to Celsius?
Celsius Network was established to allow users to lend and also receive credit in cryptocurrencies. It has been in operation since 2017. It successfully raised over $50m via an ICO, an asset which itself is currently being battered. Although originally registered in the UK, it has departed these shores due to the regulatory uncertainty surrounding the FCA’s posture on cryptocurrency. The company paid owners of crypto highly attractive interest rates – e.g. 17% – if they deposited their coins on its platform. Like a bank, Celsius was also lending coins to other platforms and trading on its own account. That means there is a risk that, while it has been underwriting liquidity within the market, it does not still own all the coins that were deposited with it. The company announced at the start of this week it is freezing the assets of its users.
#2. How many people have been affected – and what can they do?
Current estimates are that Celsius has around 1.7m users. Many have already been redeeming their assets in recent weeks as the main cryptocurrencies have continued to sell off. But now Celsius has brought the shutters down. Celsius is within its rights under the terms of its user agreements to initiate the freeze. The loans provided to Celsius are unsecured – there is no current legal recourse to recover them, although we anticipate that the legal department at Celsius is going to be very busy this summer. Celsius has been at pains to distance itself from banking regulation to prevent governments expecting it to apply for a banking license and fall under the scope of banking insurance, either in the US or anywhere else.
#3. What are the implications for the cryptocurrency market?
Bitcoin dropped over 20% to reach a low of $20,800 at the start of this week. Ever since the crypto rally in November, in response to Bitcoin ETF Futures product being launched, crypto has been on a ruthless downtrend with little sign of relief. The market remains justifiably fearful of the potential impacts of Celsius becoming insolvent, whilst still having billions of assets under management. The decline in their assets under management has been remarkable, falling from $28 billion in November to around $3 billion today. But we view this as teething problems for the market. It is the first time it is being tested by a large bear market. Questions are being asked of platforms which they simply have not had to answer before. These events, like the financial crisis in 2008, will demonstrate who has the solid foundations required to operate responsibly in this market.
#4. What about lending strategies?
Celsius’ liquidity issues raise serious concerns about high yields on many lending platforms, and crypto critics will feel more confident in their views around the legitimacy of DeFi. Investors should be cautious with lending firms offering lucrative yields of double-digits on assets like Bitcoin and Ethereum. Market participants should consider the risks involved like smart contract exploits, lenders becoming insolvent and whether the protocol has been stress tested. We are still in the early phase of crypto, where many DeFi products are being tested and selectivity will result in many failing along the way.
#5. Will the fall out affect other platforms like Celsius?
We are seeing impacts across the board of centralised lenders, as BlockFi is also facing problems too. They announced in a blog post Tuesday that they are letting go of 170-200 employees, which is 20% of the lender’s total staff headcount. This follows a string of established crypto companies decreasing employee numbers, because of the ongoing chaos happening in this market downturn. Crypto.com CEO, Kris Marszalek, said on Friday that the company is laying off around 260 employees.
However, unfortunate events with lenders like Celsius and other crypto firms will not prevent savvy investors from investing directly into mainstream cryptocurrencies. The intrinsic value of borderless, permissionless and blockchain-native assets will continue to thrive in the long term.
With thanks to Marcus Sotiriou, analyst with GlobalBlock in the UK for his input on this article.
