Focus: How crypto lender Celsius stumbled on risky bank-like investments

Genesis Healthcare

15/06/2022 15:41

By Hannah Lang, Carolina Mandl and Elizabeth Howcroft
    June 15 (Reuters) - Celsius Network, the retail crypto
lending platform whose liquidity problems have sent
cryptocurrencies plunging, stumbled on 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
finance chief said Celsius, along with the industry, had seen
redemptions rise following the collapse of cryptocurrency
TerraUSD in May.  urn:newsml:reuters.com:*:nL4N2Y00N5
    Cryptocurrencies have since lost over $400 billion in value.
    Similar to a bank, Celsius gathers crypto deposits from
retail customers and invests them in the equivalent of the
wholesale crypto market, including "decentralized finance" or
DeFi sites that use blockchain technology to offer services from
loans to insurance outside the traditional financial sector.
 urn:newsml:reuters.com:*:nL4N2Y02QJ
    Unlike banks, Celsius promises retail customers huge
returns, sometimes as much as 18.6% annually. The lure of big
profits has led individual investors to pour assets into Celsius
and platforms like it. Its CEO Alex Mashinsky said in October
Celsius had $25 billion in assets, although that had fallen to
around $11.8 billion as of last month, its website showed. 
    Celsius appears to have stumbled on its wholesale crypto
investments, according to public blockchain information and
analysts who track such data. As those investments soured, the
company was unable to meet redemptions from customers fleeing
amid the broader crypto market slump, analysts said.
    “This is the closest we've seen to a bank run” in the
cryptocurrency sector, said Noelle Acheson, head of market
insights at Genesis, a digital currency prime brokerage. 
    Mashinsky and a representative for Celsius did not respond
to requests for comment. The company said on Sunday it was
taking steps to meet redemptions but "there may be delays."
    Celsius' problems date back to at least December when, at
the hands of hackers, it lost $54 million worth of bitcoin it
had invested with DeFi platform BadgerDao, according to public
blockchain data. At the time, Mashinsky said Celsius lost money,
but did not disclose how much.
    Celsius had also invested in the Anchor protocol which
offered up to 20% returns on deposits of TerraUSD. As TerraUSD
fell, Celsius pulled more than $535 million in crypto assets
from Anchor, according to public blockchain data.  urn:newsml:reuters.com:*:nL3N2X20X8
    Mashinsky said in a May interview https://www.youtube.com/watch?v=eRlNlNlaFi8&t=42s
 that its exposure to TerraUSD was small relative to its assets
but did not say if the company had lost money.
    The company's biggest misstep, though, appears to have been
its decision to invest customers' ether tokens with Lido
Finance, a DeFi platform offering investors the chance to profit
from a new version of ether that is in development. The
investments are known as "staked" ether, or stETH. 
    Celsius promised customers between 6% and 8% returns on
ether deposits. It had at least $450 million in stETH in its
primary 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,
stETH's price has dropped compared to ether in recent weeks as
the crypto market fall 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,
said analysts.
    “Everybody ... could see that they had positions that were
significantly under risk,” said Thurman.
    The slump in bitcoin, which has shed about half its value
this year, has also pressured Celsius. It pledged crypto assets
pegged to bitcoin as collateral against a loan of other
cryptocurrencies, according to Thurman. As bitcoin fell, Celsius
had to top up that collateral, said Thurman. 
    In 2019, Mashinsky told the Financial Times that Celsius had
crypto loans collateralized with bitcoin. 
    "The whole thing is just mispriced risk," Cory Klippsten,
CEO of crypto investment platform Swan Bitcoin, said of Celsius'
business model. 
    
    CONTAGION WORRIES
    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 investor runs. 
    On Tuesday, the chair of the U.S. Securities and Exchange
Commission said such platforms operate a bit like banks and that
promised high returns might be "too good to be true."
 urn:newsml:reuters.com:*:nL1N2Y1113
    Celsius' peers have been quick to distance themselves from
stETH. On Monday, New Jersey-based BlockFi tweeted it does not
hold any stETH principally or as collateral. Voyager Digital,
also New Jersey-based, tweeted it has never engaged in DeFi
lending activities 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 drop relative to ether, there is
a "risk of pretty 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)
 ((Hannah.Lang@thomsonreuters.com;))