How a Crypto Bank Went Bankrupt — The Journal.

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This tran­script was pre­pared by a tran­scrip­tion ser­vice. This ver­sion may not be in its final form and may be updated.

Ryan Knut­son: In 2017, a man named Alex Mashin­sky found­ed a bank. It was a new kind of bank designed specif­i­cal­ly for cryp­tocur­ren­cies. He called it Cel­sius. Here he is a few years ago talk­ing about what is new bank would do.

Alex Mashin­sky: It rein­vents what a bank is. It rein­vents what a cus­to­di­an is. It rein­vents who you trust for your mon­ey, how you trans­act with oth­er. It elim­i­nates all the mid­dle­men’s from a bank-

Ryan Knut­son: At one point he even said Cel­sius was safer than a tra­di­tion­al bank. He often wore shirts that said, banks are not your friends.

Alex Mashin­sky: Our slo­gan is unbank your­self. It com­plete­ly elim­i­nates the need for a bank as an intermediary.

Ryan Knut­son: Cel­sius allowed its cus­tomers to take out cheap loans and park their cryp­to in high inter­est sav­ings accounts, and the com­pa­ny took off. In just a few years, Cel­sius col­lect­ed about $25 bil­lion in cryp­to assets. But over the past few months, Cel­sius has start­ed to col­lapse. Now, the com­pa­ny has around just $4 bil­lion in assets. In July Cel­sius has filed for bank­rupt­cy and the com­pa­ny has frozen rough­ly half a mil­lion accounts, leav­ing cus­tomers with no way to access their cryp­to. Our col­league Alexan­der Glad­stone has been cov­er­ing it and he says, it rais­es big ques­tions about what’s going to hap­pen to all that money.

Alexan­der Glad­stone: What we’re enter­ing now is this unchart­ed ter­ri­to­ry where there aren’t estab­lished laws and reg­u­la­tions that will deter­mine how to resolve these very com­plex issues and huge amounts of investor losses.

Ryan Knut­son: Wel­come to The Jour­nal, our show about mon­ey, busi­ness and pow­er. I’m Ryan Knut­son. It’s Tues­day, July 26th. Com­ing up on the show, how Cel­sius went from claim­ing to be bet­ter than a bank to bankrupt.
Cel­sius Net­work, which is based in New Jer­sey, was try­ing to be the cryp­to ver­sion of a nor­mal bank. Instead of deposit­ing dol­lars, peo­ple would deposit their crypto.

Alexan­der Glad­stone: Cel­sius is essen­tial­ly a unreg­u­lat­ed cryp­tocur­ren­cy bank where the val­ue propo­si­tion is you as a per­son, as an investor, you have some cryp­tocur­ren­cy assets, whether it’s some Bit­coin or Doge­coin or Ethereum or what­ev­er, put it into our accounts and we will give you up to 17% annu­al return.

Ryan Knut­son: And that’s a lot of inter­est. I mean, most check­ing accounts, well maybe if you’re lucky give you 1% inter­est and Cel­sius was offer­ing 17% or more.

Alexan­der Glad­stone: 17 or 18%, it’s a mas­sive inter­est rate. And it’s very, very unusu­al to have such a high inter­est rate. And so for a per­son who owns cryp­to assets, it was very attrac­tive that you put it into these accounts and you get this very juicy return.

Ryan Knut­son: Was any­body skep­ti­cal about this idea? Because when I hear give us your mon­ey and we can give you a 17% return, that just sounds impos­si­ble based on every­thing I’ve ever learned about the world of finance.

Alexan­der Glad­stone: I total­ly agree. And I think that most peo­ple would say that any­one who’s offer­ing you such an above mar­ket return, there must be some­thing fishy or sus­pi­cious about what’s going on and it might not be that reli­able, but this was with­in the con­text of the cryp­tocur­ren­cy indus­try, which had seen such incred­i­ble growth and so many for­tunes that were mint­ed from peo­ple who invest­ed ear­ly into Bit­coin and all sorts of oth­er things that these pos­si­bil­i­ties did­n’t seem that far fetched in a cer­tain way where it’s like, hey there’s peo­ple who are Bit­coin bil­lion­aires. Some 17 year old kid who start­ed buy­ing Bit­coin out of his mom’s bed­room and he’s a bil­lion­aire now. Any­thing can hap­pen. So 17% for giv­ing this deposit does­n’t seem that crazy to me.

Ryan Knut­son: Cel­sius says it was able to deliv­er these high returns because of the way it invest­ed cus­tomer deposits. It said it could take cus­tomer deposits and lend it out to oth­er insti­tu­tions for even high­er returns. The oth­er rea­son Cel­sius said it was able to do it was because it sim­ply shared more of its prof­its with cus­tomers than tra­di­tion­al banks do. In inter­views, Mashin­sky often said reg­u­lar banks were just being stingy.

Alex Mashin­sky: The banks are doing a very good job for them­selves and for their share­hold­ers. Here, we’re doing a very good job for the depositors.

Ryan Knut­son: Cel­sius did­n’t just take deposits and pay inter­est though. It also gave out loans like to peo­ple like John Baselitz, he’s a real estate agent in Philadel­phia. In March of this year, he took out a loan worth $125,000 from Cel­sius at a 1% inter­est rate. In order to get the loan he had to give Cel­sius some of his Bit­coin and Ethereum as col­lat­er­al. And what was attrac­tive to you about that arrange­ment with Celsius?

John Baselitz: It was just very easy access to funds. I mean, I had the col­lat­er­al. I think from the moment I request­ed it to when I received the funds was four hours or some­thing. If you were to take out this loan in US dol­lars, they would wire it into your account, that would take a few busi­ness days. Then to get those funds from your bank account back onto a cryp­to exchange would be anoth­er sev­en day busi­ness day pro­cess­ing hold. So the whole rea­son peo­ple are into cryp­to is kind of just the ease of access.

Ryan Knut­son: Why not just use a reg­u­lar bank or some oth­er insti­tu­tion to take out a loan like this?

John Baselitz: I mean, they don’t have the infra­struc­ture in place and I’m sure the inter­est rate would be high­er than 1% on that. So, ulti­mate­ly I think Cel­sius, they were act­ing as a bank but they’re not reg­u­lat­ed like a bank.

Ryan Knut­son: You gave quite a bit of your mon­ey to this com­pa­ny, Cel­sius, did you have any con­cerns about them at all at the time?

John Baselitz: Yeah, I did. I mean, it’s a pri­vate com­pa­ny so you don’t have access to their finan­cials and you kind of have to use heuris­tics, you dig around, you dig around on cryp­to Twit­ter, you go through the Red­dit threads. I mean you try to make the best deci­sions you can with the infor­ma­tion you have available.

Ryan Knut­son: Cel­sius was able to win over a lot of peo­ple like John. At one point, it had more than a mil­lion customers.

Alexan­der Glad­stone: They grew very, very fast. Mashin­sky him­self said the amount of dig­i­tal assets on the com­pa­ny’s plat­form grew faster than the com­pa­ny was pre­pared to deploy. So it was grow­ing so fast that they did­n’t even know what to do with it.

Ryan Knut­son: But there was a hid­den weakness.

Alexan­der Glad­stone: The mod­el real­ly depend­ed on cryp­tocur­ren­cies, ris­ing in val­ue to some extent. Because it becomes sort of a house of cards when things start going down. What hap­pens is when things start going down, that’s when peo­ple start with­draw­ing mon­ey and then that’s what can real­ly cause things to spiral.

Ryan Knut­son: That’s spi­ral, when we come back.
Cel­sius began to find itself in trou­ble when the cryp­tocur­ren­cy mar­ket start­ed tum­bling ear­li­er this year.

Speak­er 5: It’s a black bath across glob­al cryp­to markets.

Speak­er 6: Cryp­to’s all for one ethos was its biggest draw. Now pan­ic is spread­ing across the universe.

Speak­er 7: Insti­tu­tion­al investors are flee­ing cryptocurrency.

Alexan­der Glad­stone: There’s a num­ber of fac­tors. The mar­kets, oth­er asset class­es were also declin­ing in val­ue too and there were sort of a gen­er­al risk off sense in the markets.

Ryan Knut­son: The fol­low­ing price of cryp­to cre­at­ed a gen­er­al sense of panic.

Alexan­der Glad­stone: It sort of shat­tered the sense that every­thing was going to be okay. And it sort of made peo­ple real­ize whoa, even things that we thought were rel­a­tive­ly sta­ble and had been grow­ing for a long time, these things can col­lapse very rapid­ly and cause huge, bil­lions of dol­lars of loss­es, very, very quick­ly. So that just rat­tled the mar­kets and made peo­ple start to think, oh my God, maybe we should with­draw our mon­ey from this.

Ryan Knut­son: John, the real estate bro­ker in Philadel­phia was one of those peo­ple. He start­ed look­ing into get­ting his mon­ey out of Celsius.

John Baselitz: I start­ed get­ting a lit­tle bit wor­ried. I decid­ed to just close out my loans, pull out my col­lat­er­al and get my assets off the plat­form or at least attempt to.

Ryan Knut­son: In mid-June John says he paid back his loan and tried to get his orig­i­nal col­lat­er­al back. Cel­sius sent some of the mon­ey, but not the final $172,000 worth of Bit­coin that he was owed. His cus­tomer por­tal just said the trans­ac­tion was pend­ing and at that point Cel­sius had­n’t said much about what was going on.

John Baselitz: That point there was def­i­nite­ly but­ter­flies in my stom­ach because at that time if you were active on Twit­ter, you would’ve seen the hun­dreds, if not thou­sands of posts basi­cal­ly talk­ing about poten­tial Cel­sius insol­ven­cy. So at that time, sure, there’s a lot of anx­i­ety going on. Yeah, it makes you won­der what’s going on.

Ryan Knut­son: Part of what was going on was that too many cus­tomers were try­ing to pull their mon­ey out of Cel­sius all at once.

Alexan­der Glad­stone: They began increas­ing­ly with­draw­ing their mon­ey from their Cel­sius accounts. They call it a run on the bank. When you’re a bank and you have all these deposits, but then you lend a lot of mon­ey out. When peo­ple start ask­ing for their mon­ey back, you can see how things can get very-

Ryan Knut­son: Yeah, because you don’t have it.

Alexan­der Glad­stone: You don’t have it. So, that’s why on June 12th Cel­sius froze the accounts and they’re frozen to this day.

Ryan Knut­son: One of the rea­sons Cel­sius was­n’t able to give cus­tomers back their mon­ey is because so much of it had been invest­ed in risky bets that were dif­fi­cult to get out of.

Alexan­der Glad­stone: They filed for bank­rupt­cy rough­ly a month lat­er. And that’s where we’re now in a whole new realm. It gives them cer­tain pro­tec­tions where it gives them now time to fig­ure out what they’re going to do from here. And it’s now offi­cial that they are not going to be hon­or­ing any with­draw­al requests for the fore­see­able future.

Ryan Knut­son: Cel­sius said in a blog post that if it did­n’t freeze cus­tomer accounts, then the only peo­ple who would’ve been able to with­draw their mon­ey, would’ve been the peo­ple who act­ed first. The com­pa­ny also said that a lot of com­pa­nies they’ve gone through bank­rupt­cy and emerged stronger after­ward. But for peo­ple like John, it means it could be awhile before he gets his cryp­to back, if at all.

John Baselitz: I think I’m a pret­ty lev­el head­ed guy and I don’t think for me it’s not help­ful to kind of dwell on the woe is me, every­thing’s going to be ruined. You just have to kind of take a log­i­cal lev­el head­ed approach and day by day, wait to see what new infor­ma­tion comes out. And if I had every dol­lar I own on the plat­form, I would cer­tain­ly be feel­ing dif­fer­ent­ly. But, I’ve diver­si­fied myself to an extent where this is a painful wound but it’s not fatal by any stretch. But at the same time would I like to have those assets in my pos­ses­sion? Absolutely.

Ryan Knut­son: The col­lapse of a cryp­tocur­ren­cy bank is very dif­fer­ent from the col­lapse of a tra­di­tion­al bank or stock bro­ker­age account. Banks and bro­ker­ages are high­ly reg­u­lat­ed, cryp­tocur­ren­cy isn’t.

Alexan­der Glad­stone: So put it this way. Let’s say that you have some stocks in a stock bro­ker­age account. Let’s say for some rea­son that bro­ker­age goes under, it files for bank­rupt­cy. The cur­rent legal frame­work for secu­ri­ties bro­ker­ages is those assets, the stocks and bonds or what­ev­er that you own, they are yours and they are seg­re­gat­ed, sep­a­rat­ed from the assets and the bal­ance sheet of the bro­ker­age itself. That’s cod­i­fied into law. So even if that bro­ker­age fails, your assets are still separate.

Ryan Knut­son: So if that bro­ker­age owes mon­ey to any­body else, they can’t use my stocks to pay those oth­er peo­ple back?

Alexan­der Glad­stone: Yeah. You own it. It’s yours. It’s your account. It just hap­pens to be that the bro­ker­age, which it’s parked in hap­pens to have failed. But it’s not min­gled with their bal­ance sheet. That cre­ates a pow­er­ful legal pro­tec­tion for you and this is a reflec­tion of the fact that the secu­ri­ties indus­try is a fair­ly mature indus­try. Stocks and bonds, this has been around for a long time and there’s a lot of laws to estab­lish how var­i­ous claims are treat­ed. Those laws do not apply to cryp­tocur­ren­cy and in fact, we’re in a sit­u­a­tion where the cryp­tocur­ren­cy indus­try has grown so fast and become so big over the past decade, that it’s grown way faster than the reg­u­la­tors and law­mak­ers have been able to keep up with. So there aren’t laws for this. We’re in unchart­ed territories.

Ryan Knut­son: Law­mak­ers are look­ing for ways to reg­u­late the cryp­tocur­ren­cy indus­try, but any new laws are a long way off. Are there any lessons here for reg­u­la­tors, for oth­er peo­ple in the cryp­tocur­ren­cy indus­try or even cryp­tocur­ren­cy investors?

Alexan­der Glad­stone: I would say it used to be that you would think about it as you’re invest­ing in the cryp­tocur­ren­cy. But now when you see that there’s actu­al risk of the plat­forms fail­ing, you have to think about it like you’re actu­al­ly invest­ing in the plat­form and you need to think about, is this a plat­form that could shut down tomor­row and leave my account frozen or is this one that is, I believe, is a sol­vent well func­tion­ing enti­ty that is going to be a busi­ness for many years to come. It real­ly makes you have to think about that. You aren’t just invest­ing in the coin, you’re invest­ing in the plat­form too.

Ryan Knut­son: That’s all for today, Tues­day, July 26th. The Jour­nal is a co-pro­duc­tion of Gim­let and the Wall Street Jour­nal. Addi­tion­al report­ing in this episode by Vicky Ge Huang. Thanks for lis­ten­ing. See you tomorrow.

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