A crash could leave those depositors broke.
The company’s balance sheet has been in free fall since late last year, shortly after raised $750 million of major venture capital firms and a major Canadian pension system, with reported assets plummeting by 50 percent since late December. Celsius’s digital token CEL has also deteriorated in price, from trading near $4 at the end of 2021 to just 0.32 cents now. Another rival company has already offered to collect certain assets in light of “what appears to be the insolvency” of Celsius.
Crypto firms are already on high alert after weeks of uncertainty in a market downturn that has seen the value of the entire market fall by two-thirds from its peak of $3 trillion in early November. Crypto markets are also reeling from the recent collapse of TerraUSD, a so-called stablecoin whose popularity soared thanks to sky-high returns promised through a connected lending platform. The drop in Celsius has done little to help the market turmoil, with Bitcoin price falling further to around $22,000, a far cry from its November high of $67,000.
The ongoing crisis has sparked fresh fears that market regulators could kill off nascent crypto lending businesses that have been positioned as alternatives to traditional banks.
“I am quite angry at the recklessness[ly] Celsius is conducting their business,” Crypto Finance CEO Patrick Heusser said in an email, referring to the company’s high-yield promises. “My guess is that the result will be a pretty strong or overblown move by regulators (rather than a well-thought-out move).”
“In the end, the consumer is being punished (again) and so are all serious service providers who act in a thoughtful and regulated manner,” he added.
Heusser is far from alone. At a fintech conference in Amsterdam last week, attendees who worked for crypto firms whispered concerns about Celsius and feared a regulatory backlash. Among the few who felt comfortable talking about it publicly was Stephen Richardson, vice president of product strategy and business solutions at crypto firm Fireblocks.
Regulators would be “very quick” to address a crisis in crypto lending, he told the audience, especially after the recent crisis in the stablecoin market saw investors lose billions. “We have to be careful there,” she said.
Celsius did not respond to POLITICO for comment.
a watchful eye
Market volatility is nothing new for most cryptocurrency companies. This time is different, however, because regulators on both sides of the Atlantic are watching, and the general market sentiment is much more bearish.
For more than a year, US state and federal agencies have been ramping up their efforts around lending businesses, which are more widespread in the US. BlockFi has agreed to pay $100 million to the Securities and Exchange Commission and nearly three dozens of state regulators last year. to settle charges that it had operated an illegal lending business, while Celsius and other businesses received cease-and-desist letters from at least four state regulators.
“It’s mind-boggling to me,” John Reed Stark, the former head of the SEC’s Office of Internet Enforcement, said in an interview, adding that lending platforms have become “a plague with no regulatory oversight, no consumer protection. No fiduciary infrastructure of any kind.”
The EU’s executive arm and lawmakers in Brussels are also on the lookout as they approach a new bill that aims to regulate European crypto asset markets, dubbed MiCA.
The bill will set the standard for stablecoins, digital assets that are pegged to a national currency or basket of liquid assets to keep their value stable. The recent collapse of TerraUSD strengthened lawmakers’ resolve for these rules, especially as the “algorithmic” stablecoin relied on financial engineering to maintain the peg to the dollar.
MiCA does not target crypto loans. But it sets strict industry standards and oversight for crypto token-issuing companies setting up shop in Europe after the rules come into effect. The Celsius crisis shows the need to strengthen those draft rules to ensure that pre-existing crypto firms are also in scope, according to Green MEP Ernest Urtasun.
“Misleading selling scandals are growing in the cryptocurrency sector, while consumer and investor protection regulations to [retail investors] they do not adequately address the reality of this new sector,” said the Spaniard, who has played an influential role in negotiating MiCA and anti-money laundering rules for cryptocurrencies in the European Parliament.
He also took aim at a grandfather clause in the European Commission’s MiCA proposal that would “prevent the application of the new set of EU rules to actors that are already operating.” In theory, such a move would exempt Celsius from MiCA, because the lender already has an office in Lithuania. “Cases like Celsius are once again showing the need to remove such a provision,” he said.
The main concern of market entrepreneurs is that regulators could restrict or ban crypto lending altogether. While the EU does not have uniform rules in place for lending outside of mortgage and credit lending, the fear is that the European Commission will feel compelled to shut down the sector. That is unlikely to happen within the remainder of his legislative cycle, which ends in 2024, unless the crisis is too big to sit idle.
Certain lenders, such as Celsius, which promotes itself as a bridge between traditional banking models and crypto-based decentralized finance, have lured retail investors to their platform by advertising high returns if they deposit their crypto assets with them. Like traditional banks, these platforms lend these funds to borrowers in exchange for collateral that is seized if the loans are not paid back.
Many of these loans are used by large crypto investors to buy more digital assets because their interest rates are much lower than they would be in traditional financial markets. This strategy can generate great returns on crypto investments in boom times. The losses, however, can be massive if the market turns sour.
Like its competitors in the business, Celsius uses its deposits for loans and profits from the interest difference.
But authorities in New Jersey and Texas found that the platform also generates income “through cryptocurrency trading, lending, and lending,” as well as “engaging in proprietary trading,” the practice of investing for direct gains from the market in instead of on behalf of clients. . Their concern is that Celsius overexposed itself through these practices, leaving its depositors on the hook.
“Now we’re seeing the negative effects of… unregulated lending platforms that don’t have enough collateral” in the crypto market, said Marshall Hayner, CEO of Metal Pay, a US-based crypto payments company.
Hayner fears the regulator’s ax will also hit crypto lenders in the decentralized finance space, where computer programs execute and record transactions across multiple online ledgers without the use of a central entity.
DeFi borrowers often have to provide collateral worth more than the loan they seek from a consortium of crypto investors, much like peer-to-peer lending.
“It is important that we protect innovation for cryptocurrencies in the United States, while also preserving the safeguards that we expect in traditional banking and financial services,” Hayner said. “A good step is a strong framework for stablecoin regulation that is not reactionary in nature but thoughtful and supportive of competition.”