Crypto lending company Celsius Network has halted withdrawals and transfers, amid an apparent liquidity crisis, while the price of Bitcoin has plummeted to pre-pandemic levels.
Celsius, which promises high-yield returns on client deposits, appears to be the latest crypto company to bend under restrictive financial conditions. It comes just a month after the collapse of the Earth-Moon stablecoin network.
Celsius operates as an unregulated bank, attracting customers with incredibly high rates for cryptocurrency deposits and then lending those deposits to other customers.
Celsius claims that its loans are secured in Bitcoin (although not all of them are), and there is no guarantee that it can pay customers in the event of a rush to withdrawals, especially since the price of Bitcoin has fallen by 40% in the last year.
The company’s co-founder and CEO Alex Mashinsky has spent years suing critics for spreading “FUD” — or “fear, uncertainty and doubt” — about Celsius Network’s liquidity.
“Mike, do you know even one person who has a problem withdrawing from Celsius?” Mashinsky asked venture capitalist Mike Dudas on Twitter on June 11.
The next day, June 12, Celsius stopped sampling, citing “extreme market conditions.” CEL, a currency issued by Celsius, has fallen 32% since then.
What Is Celsius Network?
Celsius Network is a large venture-backed cryptocurrency company, which was valued at $4.1 billion after its most recent Series B funding round in November 2021, according to PitchBook. Since November, however, the total crypto market has lost more than 60% of its value, losing $1.6 trillion in market capitalization, according to CoinMarketCap.
Celsius offers customers a 17% annual return on deposits, a shocking proposition compared to traditional banks that, on average in the U.S., currently offer an annual return of 0.07% for savings accounts, according to the Federal Deposit Insurance Corporation (FDIC).
Cryptocurrency lenders like Celsius are not regulated like traditional banks and do not have basic protections like deposit insurance, which has been a staple of U.S. banking regulation since the FDIC was founded in 1933 following the Great Depression.
“The cryptocurrency industry is learning all the old lessons from traditional finance again and again,” said Todd Phillips, a former FDIC lawyer who is now the director of financial regulation and corporate governance at the Center for American Progress, a liberal think tank. many of the damage here and the losses could have been avoided.”
Regulation of cryptocurrency lenders
Celsius is just the latest in a series of cryptocurrency lending failures, and it’s clear that these companies require basic regulations to protect their customers.
In 2020, cryptocurrency lender Cred went bankrupt after taking out bad loans. The TerraUSD stablecoin and its sister coin Luna collapsed in May 2022 after customers made massive withdrawals on the anchor protocol, which similarly offered 20% returns to customers.
But the greatest omen of Celsius’ struggles is its closest competition. BlockFi, a popular cryptocurrency lender that advertised annual returns of 9%, settled for $100 million with the U.S. Securities and Exchange Commission (SEC) in February 2022 and promised to register its interest account product as a security.1In a statement, SEC law enforcement director Gurbir Grewal warned BlockFi colleagues to “take note immediately.”
Cryptocurrency creditors could operate like banks, but their loans can also qualify as securities under federal law if they pass the Howey test, a four-part column in a 1946 Supreme Court case, said Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law. To qualify as an “investment contract” under federal law, a financial product would require (1) an “investment of money” in (2) a “joint venture” with (3) a “reasonable expectation of profit” that (4) results from the “efforts of others”.
Popular cryptocurrency exchange Coinbase discontinued its planned crypto lending product in 2021 following legal threats from the SEC. Similarly, Celsius has received cease and desist letters from four U.S. states — Texas, New Jersey, Alabama, and Kentucky — that claim to be unregistered securities. So far, there has been no federal action against Celsius, but it may come soon.
“I imagine some of the SEC’s subpoenas will come if they haven’t already arrived,” said Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law. “I fully expect some enforcement action taken not only by the SEC, but also by government securities regulators.”
“Celsius is going to be flooded with subpoenas and enforcement actions,” he added. “This is just the initial stage of this story.”
Celsius is hurting the wider cryptocurrency market
Celsius’ decision is rippled throughout the struggling cryptocurrency market. On June 13, cryptocurrency exchange Binance halted bitcoin withdrawals in the wake of The Celsius news, and Bitcoin and Ether prices fell 11% and 13%, respectively, on the last day amid an industry-wide sell-off. The collapse of cryptocurrencies is likely related to that of the traditional stock market, as the S&P 500 opened in bear market territory on June 13. While BlockFi announced that it is laying off 20% of its staff on June 13, rival company Nexo has offered to buy Celsius.
“We’re in a crypto winter,” Phillips said. “Without regulation, companies tend to have only rosy predictions of the future and just expect asset values to continue to rise. Regulations help ensure that they plan for the future when asset values fall. Since many of these things have not been regulated, I predict that we will see many more explosions.”
Reiners paraphrased Warren Buffet: “When the tide goes out, you see who swims naked.”