How crypto lender Celsius stumbled on risky bank-like investments

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Cel­sius Net­work logo and rep­re­sen­ta­tions of cryp­tocur­ren­cies are seen in this illus­tra­tion tak­en, June 13, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

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June 15 (Reuters) — Cel­sius Net­work, the retail cryp­to lend­ing plat­form whose liq­uid­i­ty prob­lems have sent cryp­tocur­ren­cies plung­ing, stum­bled on com­plex invest­ments in the whole­sale dig­i­tal asset mar­ket in what ana­lysts say was akin to a tra­di­tion­al bank run.

Cit­ing extreme mar­ket con­di­tions, New Jer­sey-based Cel­sius this week froze with­drawals and trans­fers between accounts “to sta­bi­lize liq­uid­i­ty.” In a video on Fri­day, the com­pa­ny’s finance chief said Cel­sius, along with the indus­try, had seen redemp­tions rise fol­low­ing the col­lapse of cryp­tocur­ren­cy Ter­raUSD in May. read more 

Cryp­tocur­ren­cies have since lost over $400 bil­lion in value.

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Sim­i­lar to a bank, Cel­sius gath­ers cryp­to deposits from retail cus­tomers and invests them in the equiv­a­lent of the whole­sale cryp­to mar­ket, includ­ing “decen­tral­ized finance” or DeFi sites that use blockchain tech­nol­o­gy to offer ser­vices from loans to insur­ance out­side the tra­di­tion­al finan­cial sec­tor. read more 

Unlike banks, Cel­sius promis­es retail cus­tomers huge returns, some­times as much as 18.6% annu­al­ly. The lure of big prof­its has led indi­vid­ual investors to pour assets into Cel­sius and plat­forms like it. Its CEO Alex Mashin­sky said in Octo­ber Cel­sius had $25 bil­lion in assets, although that had fall­en to around $11.8 bil­lion as of last month, its web­site showed.

Cel­sius appears to have stum­bled on its whole­sale cryp­to invest­ments, accord­ing to pub­lic blockchain infor­ma­tion and ana­lysts who track such data. As those invest­ments soured, the com­pa­ny was unable to meet redemp­tions from cus­tomers flee­ing amid the broad­er cryp­to mar­ket slump, ana­lysts said.

“This is the clos­est we’ve seen to a bank run” in the cryp­tocur­ren­cy sec­tor, said Noelle Ache­son, head of mar­ket insights at Gen­e­sis, a dig­i­tal cur­ren­cy prime brokerage.

Mashin­sky and a rep­re­sen­ta­tive for Cel­sius did not respond to requests for com­ment. The com­pa­ny said on Sun­day it was tak­ing steps to meet redemp­tions but “there may be delays.”

Cel­sius’ prob­lems date back to at least Decem­ber when, at the hands of hack­ers, it lost $54 mil­lion worth of bit­coin it had invest­ed with DeFi plat­form Bad­ger­Dao, accord­ing to pub­lic blockchain data. At the time, Mashin­sky said Cel­sius lost mon­ey, but did not dis­close how much.

Cel­sius had also invest­ed in the Anchor pro­to­col which offered up to 20% returns on deposits of Ter­raUSD. As Ter­raUSD fell, Cel­sius pulled more than $535 mil­lion in cryp­to assets from Anchor, accord­ing to pub­lic blockchain data. read more 

Mashin­sky said in a May inter­view that its expo­sure to Ter­raUSD was small rel­a­tive to its assets but did not say if the com­pa­ny had lost money.

The com­pa­ny’s biggest mis­step, though, appears to have been its deci­sion to invest cus­tomers’ ether tokens with Lido Finance, a DeFi plat­form offer­ing investors the chance to prof­it from a new ver­sion of ether that is in devel­op­ment. The invest­ments are known as “staked” ether, or stETH.

Cel­sius promised cus­tomers between 6% and 8% returns on ether deposits. It had at least $450 mil­lion in stETH in its pri­ma­ry DeFi wal­let, but like­ly has more stored else­where, accord­ing to Andrew Thur­man, an ana­lyst at ana­lyt­ics firm Nansen, which tracks blockchain data.

While one stETH is sup­posed to be redeemable for one ether, stETH’s price has dropped com­pared to ether in recent weeks as the cryp­to mar­ket fall prompt­ed hold­ers to dump their stETH.

That dis­crep­an­cy will have made it dif­fi­cult for Cel­sius to con­vert its stETH back to ether to meet cus­tomer with­drawals, said analysts.

“Every­body … could see that they had posi­tions that were sig­nif­i­cant­ly under risk,” said Thurman.

The slump in bit­coin, which has shed about half its val­ue this year, has also pres­sured Cel­sius. It pledged cryp­to assets pegged to bit­coin as col­lat­er­al against a loan of oth­er cryp­tocur­ren­cies, accord­ing to Thur­man. As bit­coin fell, Cel­sius had to top up that col­lat­er­al, said Thurman.

In 2019, Mashin­sky told the Finan­cial Times that Cel­sius had cryp­to loans col­lat­er­al­ized with bitcoin.

“The whole thing is just mis­priced risk,” Cory Klipp­sten, CEO of cryp­to invest­ment plat­form Swan Bit­coin, said of Cel­sius’ busi­ness model.

CONTAGION WORRIES

Cel­sius has hired restruc­tur­ing lawyers, the Wall Street Jour­nal report­ed Tues­day. Its prob­lems have sparked fears that oth­er cryp­to lend­ing plat­forms may be at risk of investor runs.

On Tues­day, the chair of the U.S. Secu­ri­ties and Exchange Com­mis­sion said such plat­forms oper­ate a bit like banks and that promised high returns might be “too good to be true.” read more 

Cel­sius’ peers have been quick to dis­tance them­selves from stETH. On Mon­day, New Jer­sey-based Block­Fi tweet­ed it does not hold any stETH prin­ci­pal­ly or as col­lat­er­al. Voy­ager Dig­i­tal, also New Jer­sey-based, tweet­ed it has nev­er engaged in DeFi lend­ing activ­i­ties and has no expo­sure to stETH.

But accord­ing to Thur­man, sev­er­al oth­er cryp­to lend­ing plat­forms, such as Aave, invest in stETH and pledge it as col­lat­er­al. If it con­tin­ues to drop rel­a­tive to ether, there is a “risk of pret­ty sig­nif­i­cant liquidations.”

Aave did not respond to requests for comment.

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Report­ing by Han­nah Lang in Wash­ing­ton, Eliz­a­beth How­croft in Lon­don and Car­oli­na Man­dl in New York Addi­tion­al report­ing by Tom Wil­son in London
Edit­ing by Michelle Price and Mark Potter

Our Stan­dards: The Thom­son Reuters Trust Principles.

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