Celsius Has Paid Its Debts To DeFi’s Biggest Lenders, Reclaiming Over $1 Billion In Collateral

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Embat­tled cryp­tocur­ren­cy lender Cel­sius Net­work has ful­ly repaid its debts to decen­tral­ized finance (DeFi) pro­to­cols, get­ting hands on over $1 bil­lion worth of cryp­tocur­ren­cies pledged as col­lat­er­al on the platforms.

The analy­sis of the company’s cryp­to wal­lets con­duct­ed by Arkham Intel­li­gence, an Austin, Texas-based blockchain intel­li­gence firm, indi­cates Cel­sius had owed over $500 mil­lion worth of cryp­to to the three largest DeFi lenders, Com­pound, Aave and Mak­er, backed by over $1 bil­lion in var­i­ous tokens. Due to the high volatil­i­ty of dig­i­tal assets, loans on these plat­forms are gen­er­al­ly over­col­lat­er­al­ized, which means bor­row­ers have to deposit tokens worth more than their loans. In the case of Cel­sius, at least some of the col­lat­er­al was sev­er­al times the val­ue of the loans.

It remains unclear what por­tion of Cel­sius’ total assets under man­age­ment has been deployed to these appli­ca­tions, says Arkham CEO Miguel Morel, but the appar­ent fragili­ty of these posi­tions in the recent cryp­to mar­ket crash may have forced Cel­sius to use liq­uid assets to pay down debt and release the col­lat­er­al instead of hon­or­ing cus­tomer with­drawals, which have been paused since ear­ly June. 

“Cel­sius had to pre­vent its col­lat­er­al from being liq­ui­dat­ed,” explained Dan More­head, CEO of cryp­to-focused invest­ment firm Pan­tera Cap­i­tal, in a blog post. “There is no abil­i­ty to ‘re-structure”/renege on smart con­tracts. In DeFi ‘a deal is a deal’ – you can’t back out.”

On July 7, Cel­sius reclaimed $440 mil­lion of col­lat­er­al denom­i­nat­ed in wrapped bit­coin (WBTC), a token that rep­re­sents bit­coin on the Ethereum blockchain, after ful­ly pay­ing off a loan on Mak­er, DeFi’s largest lend­ing pro­to­col. Addi­tion­al­ly, Coin­Desk report­ed that a cryp­tocur­ren­cy wal­let linked to Cel­sius reduced its debt on Aave on July 12, free­ing up 410,000 in staked ether, deriv­a­tive of the Ethereum blockchain’s native asset, worth $426 million.

Ear­li­er this morn­ing, the firm paid down $50 mil­lion to Com­pound, reclaim­ing 10,000 WBTC worth about $195 mil­lion at cur­rent prices.

Andrew Thur­man, con­tent lead at blockchain ana­lyt­ics plat­form Nansen, which has been track­ing Cel­sius’ cryp­tocur­ren­cy wal­lets, says a large por­tion of the sta­ble­coins used to pay down its debts on the DeFi pro­to­cols orig­i­nat­ed from cryp­to exchange FTX, but there’s lit­tle infor­ma­tion to deduce what that means in terms of the firm’s over­all hold­ings, par­tic­u­lar­ly those sit­ting off-chain. 

With the trou­bled lender chas­ing liq­uid­i­ty tied to its old loans, reg­u­la­tors may have ques­tions about the nature of these trans­ac­tions. “The main issue is that the source of fund­ing is unclear,” says Kevin Kaiser, senior direc­tor of the Har­ris Fam­i­ly Alter­na­tive Invest­ments Pro­gram and adjunct pro­fes­sor of Finance at the Whar­ton School of the Uni­ver­si­ty of Penn­syl­va­nia. “If the source of the fund­ing comes from unin­formed providers who are not being giv­en suf­fi­cient trans­paren­cy to rec­og­nize that they’re prob­a­bly lend­ing mon­ey or giv­ing mon­ey to a very illiq­uid and pos­si­bly insol­vent bor­row­er, that’s where a com­pa­ny gets in trouble.”

Arkham Intelligence’s analy­sis of Cel­sius’ mate­ri­als and invest­ments sug­gests the lender had mis­rep­re­sent­ed its busi­ness mod­el. The firm offers users annu­al per­cent­age yields of close to 19% on cryp­tocur­ren­cy deposits and makes cryp­to loans as well as cash loans backed by dig­i­tal tokens. But Cel­sius has man­aged a notable por­tion of its assets more like a hedge fund than a bank, invest­ing deposits aggres­sive­ly in the cryp­to mar­kets rather than lend­ing them out in a low-risk man­ner to sophis­ti­cat­ed institutions. 

“It’s fair to say that, hav­ing looked at Cel­sius’ mate­ri­als, the aver­age per­son would come away think­ing that the major­i­ty of their mon­ey was only put into risk via sophis­ti­cat­ed secu­ri­ties lend­ing agree­ments with the coun­ter­par­ties that Cel­sius was lend­ing to,” explains Morel. “In real­i­ty, despite their pub­lic empha­sis on insti­tu­tion­al lend­ing, Cel­sius was chas­ing yield in oth­er places that many would not char­ac­ter­ize as low-risk.”

Cel­sius has not respond­ed to Forbes’ inquiry into these transactions.

The released col­lat­er­al could help Cel­sius nav­i­gate the finan­cial fall­out from the recent cryp­to crash. The New Jer­sey-based com­pa­ny has report­ed­ly replaced its restruc­tur­ing coun­sel this week, bring­ing lawyers from Kirk­land & Ellis LLP, the same firm that has been tapped by cryp­to bro­ker Voy­ager Dig­i­tal, which filed for bank­rupt­cy last week. 

“In a typ­i­cal restruc­tur­ing sce­nario, cash is king. You need cash so you have flex­i­bil­i­ty as a debtor to exe­cute on what­ev­er plan you’re try­ing to imple­ment, par­tic­u­lar­ly through a bank­rupt­cy process,” says Robert Gay­da, part­ner in Seward & Kissel’s cor­po­rate restruc­tur­ing and bank­rupt­cy group. “We don’t real­ly have a ton of trans­paren­cy, so we can only guess, but it cer­tain­ly is an inter­est­ing fact that they have not filed yet.”

Mean­while, Ver­mon­t’s Depart­ment of Finan­cial Reg­u­la­tion (DFR) said it thinks Cel­sius is “deeply insol­vent” and does not have the assets and liq­uid­i­ty to hon­or its oblig­a­tions to cus­tomers and oth­er cred­i­tors. The agency said Tues­day it had joined a mul­ti­state inves­ti­ga­tion of the company.

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