Tech Take: Celsius Network’s high-profile stumble could chill crypto, DeFi investment
A broad crash in the crypto market has left lending platform Celsius Network‘s risky positions exposed, and fears of crypto contagion have shaken investors.
The company is essentially insolvent since their current crypto holdings cannot meet all the obligations for customer withdrawals. Celsius responded to the liquidity crisis by halting customer withdrawals on Monday. It is also in talks with restructuring lawyers, The Wall Street Journal reported.
How we got here: Celsius is a fintech company that provides high-yield returns for customers’ crypto holdings and lets users borrow crypto. The company offers depositors APYs of about 8% for ETH. This is much higher than the typical ~5% for ETH “staking,” a way of earning interest on crypto holdings.
In order to offer this, Celsius took those deposits and leveraged them in illiquid positions that are now proving difficult to unwind. In technical terms, the company put customer assets in collateralized lending protocols like Maker and swapped ETH for stETH (staked ETH) on Lido. These activities are highly risky:
- In bear markets, deposited funds in lending protocols are much more likely to face liquidation. Celsius’ positions have been reaching liquidation levels, and the company has to continue topping up their collateral.
- When ETH is swapped for stETH, the ETH is staked and locked up for as much as 12 months, after the Ethereum 2 upgrade. This means that the ETH is not liquid, so Celsius cannot meet customers’ obligations when they are seeking to withdraw ETH.
What it means: This may look like a classic bank run, but in reality it’s more like a giant hedge fund redemption event in which the fund has suspended redemptions. And in decentralized finance land, there’s no FDIC or SIPC to step in and stop the bleeding. Celsius’ native token, CEL, fell 70% in roughly one hour after the company announced the halts.
Having raised almost $1 billion, Celsius’ potential collapse will likely scare off investors seeking to deploy capital into crypto and DeFi. A failure here will also compel regulators and legislators to act faster in the future.
In February, competitor BlockFi was fined $100 million and settled with the SEC and 32 US states for its crypto lending product. It was also forced to drop that service. Celsius has been under investigation by the SEC since the beginning of the year.
Related read: PitchBook Analyst Note: DeFi Primer
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