Celsius ’bankruptcy statement this week has surprised virtually no one. Once a platform freezes customers ’assets, it’s usually over. But just because the crash of this assaulted cryptocurrency lender wasn’t a shock, doesn’t mean it wasn’t a big deal for the industry.
In October 2021, CEO Alex Mashinsky said the crypto lender had $ 25 billion in assets under management. Even recently in May, despite falling cryptocurrency prices, the lender was managing about $ 11.8 billion in assets, according to its website. The company had an additional $ 8 billion in customer loans, making it one of the world’s leading names in cryptocurrency lending.
Now, Celsius has dropped to $ 167 million “cash in hand,” which it says will provide “ample liquidity” to support operations during the restructuring process.
Meanwhile, Celsius owes its users about $ 4.7 billion, according to its bankruptcy filing, and there is a roughly $ 1.2 billion hole in its balance sheet.
This proves that leverage is a hellish drug, but the moment you suck up all that liquidity, it’s a lot harder to keep the party going.
The fall of Celsius marks the third major bankruptcy of the crypto ecosystem in two weeks, and is being billed as the moment of Lehman Brothers crypto, comparing the contagion effect of a failed cryptocurrency provider with the fall of a major Wall Street bank that finally predicted the 2008 mortgage debt and financial crisis.
Regardless of whether the Celsius implosion predicts a larger collapse of the largest cryptographic ecosystem, the days of customers collecting double-digit annual returns are over. For Celsius, promising these great performances as a means to incorporate new users is a big part of what caused its ultimate downfall.
“They were subsidizing it and taking losses to get customers,” said Nic Carter of Castle Island Venture. “The yields at the other end were false and subsidized. Basically, they got yields from [Ponzi schemes]. “
Who will get their money back
Three weeks after Celsius stopped all withdrawals due to “extreme market conditions” – and a few days before the crypto lender finally asked for bankruptcy protection – the platform was still announcing in large bold text instead Annual web returns of almost 19%, which paid out weekly.
“Transfer your cryptography to Celsius and you could earn up to 18.63% APY in minutes,” the website read on July 3rd.
Promises like these helped attract new users quickly. Celsius said it had 1.7 million customers in June.
The company’s bankruptcy statement shows that Celsius also has more than 100,000 creditors, some of whom lent cash to the platform without any collateral to back up the deal. The list of its top 50 unsecured creditors includes Sam Bankman-Fried’s commercial firm Alameda Research, as well as an investment company based in the Cayman Islands.
These creditors are likely to be the first in line to get their money back, if there is anything to grab, with mom and pop investors staying with the bag.
After filing its bankruptcy petition, Celsius clarified that “most account activity will be stopped until further notice” and that “it did not request authority to allow customer withdrawals at this time.”
The FAQs say that the accumulation of rewards also stops through the Chapter 11 bankruptcy process and customers will not receive reward distributions at this time.
This means that customers trying to access their cash crypto are unlucky at the moment. It is also unclear whether bankruptcy proceedings will eventually allow customers to recoup their losses. If there is any kind of payment at the end of what could be a multi-year process, there is also the question of who would be the first to get it.
Unlike the traditional banking system, which typically secures customers ’deposits, there are no formal protections for consumers to safeguard users’ funds when things go wrong.
Celsius details in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. Since Celsius had no collateral, the customers ’funds were basically unsecured loans on the platform.
Also in the small print of the Celsius terms and conditions is a warning that, in the event of bankruptcy, “any eligible digital asset used in the Earn service or as collateral under the loan service may not be recoverable” and that the customers “may not have any legal recourse or right in relation to Celsius’ obligations.” Disclosure reads as an attempt at general immunity against unlawful acts, in case things go south.
Another popular lending platform that caters to retail investors with high-yield offers is Voyager Digital, which has 3.5 million customers and was also recently declared bankrupt.
To reassure its millions of users, Voyager CEO Stephen Ehrlich tweeted that after the company goes through bankruptcy proceedings, users with cryptography on their account could be eligible for some sort of clothes bag, including a combination of cryptography on your account. Common shares of the reorganized Voyager, Voyager tokens, and then any income they can get from the now defunct loan from the company to the previously prominent Three Arrows Capital cryptocurrency hedge fund.
It’s unclear what Voyager’s testimony would really be worth, or whether any of that will come together in the end.
Three Arrows Capital is the third major cryptocurrency player to seek bankruptcy protection in a U.S. federal courtroom, in a trend that cannot help but raise the question: the bankruptcy court will ultimately be the place to establish a new precedent in the cryptographic sector, in a kind of of the model regulated by regulation?
Capitol lawmakers are already looking to establish more ground rules.
Senator Cynthia Lummis, R-Wyo., And Kirsten Gillibrand, DN.Y., aim to provide clarity with a bill that establishes a comprehensive framework for regulating the cryptographic industry and divides oversight between regulators such as the Commission on Stocks and Stock Exchange. and the Commodity Futures Trading Commission.
What went wrong
The general problem with Celsius is that the almost 20% APY it offered to customers was not real.
In a lawsuit, Celsius is being accused of operating a Ponzi scheme, in which he paid depositors in advance with the money he obtained from new users.
Celsius also invested its funds in other platforms that offered equally high returns, in order to keep its business model afloat.
A report by The Block found that Celsius had at least half a million dollars invested in Anchor, which was the flagship lending platform of the terraUSD (UST) stable currency project linked to the now failed US dollar. Anchor promised investors an annual percentage return of 20% of its stakes in UST, a rate that many analysts said was unsustainable.
Celsius was one of the many platforms to park its troops with Anchor, which is a big part of why the cascade of major failures was so important and fast after the UST project imploded in May.
“They always have to get the return, so they move the assets toward risky instruments that are impossible to hedge,” said Nik Bhatia, founder of The Bitcoin Layer and adjunct professor of finance at the University of Southern California.
As for the $ 1.2 billion gap in its balance sheet, Bhatia attributes it to poor risk models and the fact that institutional lenders have run out of collateral.
“They probably lost customer deposits at UST,” Bhatia added. “When assets go down in price, that’s how you get a ‘hole.’ Responsibility is still, again, poor risk models.”
Celsius is not alone. Cracks continue to form in the loan corner of the crypto market. Carter of Castle Island Venture says the net effect of all of this is that credit is being destroyed and withdrawn, subscription standards are being tightened and solvency is being tested, so everyone is withdrawing liquidity from cryptographic providers.
“This has the effect of increasing yields, as credit becomes scarcer,” said Carter, who noted that we are already seeing this happen.
Carter expects to see a general inflationary deleveraging in the United States and elsewhere, which he says only makes the case for currencies stable, as relatively hard money, and bitcoin, as really hard money.
“But the part of the industry that depends on issuing frivolous tokens will be forced to change,” he said. “So I expect the result to be heterogeneous in the cryptographic space, depending on the specific sector.”