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Crypto lender Celsius Network pauses all account withdrawals amid market turmoil.
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The Big Story
The stock market is down. Inflation is at a 40-year high. And crypto? Well, it's doughtily facing yet another harsh winter.
Bitcoin, the world's largest cryptocurrency, dropped more than 20% to $22,875—its lowest level since December 2020. Meanwhile, Ethereum sank below $1,200 days after it completed Ropsten testnet Merge—its longest-running testnet crucial in its transition to a proof-of-stake consensus mechanism. The sell-off has now reached a level where it has dragged the crypto industry's total market cap to below $1 trillion.
But unfortunately, the damage doesn't stop there.
On Monday, Celsius Network, one of the largest crypto lending platforms, announced that it's suspending withdrawals, transfers, and swaps amid extreme market conditions.
“We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations,” it added.
Shortly after Celsius’ announcement, crypto exchange Binance also temporarily halted Bitcoin withdrawals due to "stuck on-chain transactions." While the company has since resumed withdrawals, it fueled uncertainty within the crypto community, with some predicting firms like Coinbase to join in.
But before diving into all that, a quick primer on Celsius Network: Founded in 2017, Celsius Network essentially functions like a large venture-backed unregulated bank that promises customers yields as high as 18% on their crypto deposits. So far, the company has over 1.7 million customers and more than $11.8 billion in assets.
Last year, when the DeFi industry exploded into popularity, Celsius emerged as one of the leading lending players. Its reach even extended to those who weren't involved with crypto at all, like Caisse de Dépôt et Placement du Québec (CDPQ)—Canada’s second-largest pension fund—that has a $400 million stake in the company.
But due to the recent crypto market downturn, Celsius is currently trading at 31 cents—a 90% drop since April when CEL was worth $3. And as it experiences liquidity shortages, its insolvency concerns are mounting.
So, how did we get here? Two main factors that contributed to Celsius Network’s downfall are as follows:
I. The collapse of Terra
Following the Terra/UST meltdown last month that erased $300 billion from the crypto market, rumours have been circulating as to which companies had been affected. And it appears that Celsius is one of them.
According to Nansen's investigation of the TerraUSD de-peg, Celsius was exposed to the collapse as it had invested nearly $500 million in UST. Now, with the downfall of the $14 billion protocol, all those user funds are lost.
In addition, the company has recently come under regulatory scrutiny for its yield-generation strategies, especially the GBTC arbitrage and the futures market contango. The thread below discusses the issue in detail.
II. Lido staked ETH
Besides depositing user funds in the Anchor protocol, Celsius also had a huge stake in stETH, a liquid derivative product by the Lido protocol that promises users 6-8% interest in exchange for staking their ETH in anticipation of the merge to proof-of-stake. The staked ETH is completely locked up and can only be unstaked once “the merge” is successful.
While stETH has previously traded 1-to-1 with ETH, it isn't pegged with the cryptocurrency. Regardless, Celsius considers it as such. But due to the crypto bear market, the stETH to ETH ratio has started to slide. Currently, it's trading about 4.4% lower than ETH.
With limited options to soothe its illiquidity woes, Celsius Network exited its DeFi positions by unstaking $247 million worth of Wrapped Bitcoin (wBTC) from Aave and sending it to the FTX exchange.
Is it enough?
Celsius Network CEO Alex Mashinsky deflected insolvency rumours to shadowy opportunists on Wall Street. Even hours before halting user withdrawals, he claimed that the freezes were FUD and that the company had enough liquidity.
But all this is just the tip of the iceberg. Celsius has been battling with states like Texas, New Jersey and Alabama, where authorities have accused the company of offering unregistered securities. Additionally, its CFO Yaron Shalem was also recently arrested over his involvement in money laundering and other charges.
All that said, the Celsius situation is a good reminder to be aware of self-reinforcing systems and supposed "risk-free" investments. While those interest rates may seem enticing, they're probably not worth the risks in the long run.
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