By Hannah Lang, Carolina Mandl and Elizabeth Howcroft
(Reuters) – Celsius Network, the retail crypto-lending platform whose liquidity problems have sent cryptocurrencies crashing, stumbled into 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 chief financial officer said that Celsius, along with the industry, had seen swaps increase following the collapse of the TerraUSD cryptocurrency in May.
Since then, cryptocurrencies have lost more than $400 billion in value.
Like a bank, Celsius pools crypto deposits from retail customers and invests them in the wholesale crypto market equivalent, including “decentralized finance” or DeFi sites that use blockchain technology to offer services from loans to insurance outside of the traditional financial sector.
Unlike banks, Celsius promises retail customers big profits, sometimes as high as 18.6% a year. The lure of big returns has prompted individual investors to invest assets in Celsius and similar platforms. Its chief executive, Alex Mashinsky, said in October that Celsius had $25bn in assets, though that had fallen to about $11.8bn last month, his website showed.
Celsius appears to have stumbled on his wholesale crypto investments, according to public blockchain data and analysts tracking such data. As those investments deteriorated, the company was unable to meet repayments from fleeing customers amid the broader crypto market slump, analysts said.
“This is the closest thing we’ve seen to a bank run” in the cryptocurrency sector, said Noelle Acheson, head of market research at Genesis, a major digital currency brokerage firm.
Mashinsky and a Celsius representative did not respond to requests for comment. The company said on Sunday that it was taking steps to meet refunds, but “there may be delays.”
Celsius’s troubles date back to at least December when it lost $54 million worth of bitcoins it had invested with DeFi platform BadgerDao to hackers, according to public blockchain data. At the time, Mashinsky said Celsius lost money, but did not reveal how much.
Celsius had also invested in the Anchor protocol, which offered up to 20% returns on TerraUSD deposits. As TerraUSD fell, Celsius mined more than $535 million in crypto assets from Anchor, according to public blockchain data.
Mashinsky said in a May interview https://www.youtube.com/watch?v=eRlNlNlaFi8&t=42s that his exposure to TerraUSD was small relative to his assets, but he would not say whether the company had lost money.
However, the company’s biggest misstep appears to have been its decision to invest customers’ ether tokens with Lido Finance, a DeFi platform that offers investors the opportunity to profit from a new version of ether that is in the works. developing. The inversions are known as “staked” ether or stETH.
Celsius promised customers a 6% to 8% return on ether deposits. He had at least $450 million worth of stETH in his main 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, the price of steth has dropped compared to ether in recent weeks as the crypto market crash 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, the analysts said.
“Everyone … could see that they had positions that were significantly at risk,” Thurman said.
The drop in bitcoin, which has lost about half its value this year, has also put pressure on Celsius. He pledged bitcoin-pegged crypto assets as collateral against a loan of other cryptocurrencies, according to Thurman. When Bitcoin fell, Celsius had to top up that collateral, Thurman said.
In 2019, Mashinsky told the Financial Times that Celsius had crypto loans secured with bitcoin.
“It’s all just mispriced risk,” Cory Klippsten, CEO of crypto investment platform Swan Bitcoin, said of Celsius’s business model.
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 investors drifting.
On Tuesday, the chairman of the US Securities and Exchange Commission said such platforms operate a bit like banks and the promised high returns could be “too good to be true.”
Celsius’s peers have quickly distanced themselves from stETH. On Monday, New Jersey-based BlockFi tweeted that it does not hold any stETH primarily or as collateral. Voyager Digital, also based in New Jersey, tweeted that it has never engaged in DeFi lending activity 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 fall relative to ether, there is a “risk of fairly significant liquidations.”
Aave did not respond to requests for comment.
(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)