Virtually no one was surprised by this week’s filing for bankruptcy in Celsius. When the platform freezes a customer’s assets, it’s usually all over. But just because the collapse of this embarrassed crypto lender wasn’t a shock doesn’t mean it wasn’t a big deal for the industry.
In October 2021, CEO Alex Mashinsky said: Cryptocurrency lenders had $ 25 billion in assets under management..Even as recently as May, despite the plunge in cryptocurrency prices Creditors managed assets of about $ 11.8 billion, According to its website.The company had another $ 8 billion With a client loanMakes it one of the largest crypto loan names in the world.
Now Celsius $ 167 million in “cash on hand” It states that it provides “sufficient liquidity” to support operations during the restructuring process.
Meanwhile, Celsius owes users about $ 4.7 billion. According to the bankruptcy filing — And that balance sheet has a hole of about $ 1.2 billion.
It shows that leverage is one hell of a drug, but the moment it absorbs all its liquidity, it’s very difficult to continue the party.
The collapse of Celsius marks the third major bankruptcy of the crypto ecosystem in two weeks and is being claimed as the Lehman Brothers moment of crypto. The infectious effect of failed crypto lenders, ultimately the 2008 mortgage debt and financial crisis.
Whether or not the Celsius implosion heralds a larger collapse of the larger crypto ecosystem, the era of double-digit annual revenues for customers is over. For Celsius, promising these big yields as a means of hiring new users is a big part of what led to that final dip.
“They were subsidizing it and suffering losses to get customers into the door,” said Nick Carter of Castle Island Venture. “The yield on the other end was fake and was subsidized. Basically, they [Ponzi schemes].. “
Three weeks after Mr. Seth stopped all withdrawals due to “extreme market conditions”, and a few days before cryptocurrency lenders finally filed for bankruptcy protection, the platform still advertised in large bold on its website. Was out. It comes out every week.
“If you transfer cryptocurrencies to Celsius, you could earn up to 18.63% APY in minutes,” read the website on July 3rd.
Such promises helped to quickly seduce new users. Celsius said he had 1.7 million customers as of June.
The company’s bankruptcy filing shows that Celsius also has more than 100,000 creditors, some of whom lent out platform cash without collateral to support the deal. The list of top 50 unsecured creditors includes Sam Bankman-Fried’s trading company Alameda Research and investment companies based in the Cayman Islands.
Those creditors may be the first to line up to get the money back. If anything, moms and pop investors will keep their bags.
After filing a bankruptcy filing, Celsius Clarified that “Most account activity will be suspended until further notification”, “At this time, we are not requesting permission to allow customers to withdraw.”
Frequently asked questions state that the bankruptcy process in Chapter 11 has also stopped the generation of rewards and that customers are not currently eligible for distribution of rewards.
This means that customers trying to access cryptocurrencies are currently out of luck. It is also unclear whether the bankruptcy proceedings will ultimately allow the customer to recover the loss. If there is any payment at the end of a multi-year process, there is also the question of who will receive it first.
Unlike traditional banking systems that guarantee customer deposits, there is usually no formal consumer protection to protect a user’s funds in the event of a problem.
Celsius details in the terms and conditions that the digital assets transferred to the platform constitute a user-to-Celsius loan. The customer’s funds were basically unsecured loans to the platform, as there was no collateral by Celsius.
In addition, the details of Celsius’ Terms of Service states that in the event of bankruptcy, “eligible digital assets used as collateral for revenue or borrowing services may not be recoverable,” the customer said, “laws related to the obligations of the degree. Remedies or rights. ”The disclosure can be read as an attempt to be totally exempt from legal misconduct if the situation goes south.
Another popular lending platform for private investors offering high yield bonds Voyager DigitalHas 3.5 million customers and recently filed for bankruptcy.
To reassure millions of users, Voyager CEO Stephen Ehrlich Tweeted After the company goes bankrupt, users who have cryptocurrencies in their accounts may be subject to certain grab bags such as cryptocurrency combinations in their accounts, reorganized Voyager common stock, Voyager tokens, etc. There are revenues they can earn from the company’s now obsolete loan to the once prominent crypto hedge fund, Three Arrows Capital.
It’s unclear what the Voyager tokens really are worth, or if any of these will eventually come together.
Three Arrows Capital is the third leading cryptocurrency player seeking bankruptcy protection in US federal court. Is it a regulatory model by arbitrage?
Capitol Hill lawmakers are already trying to establish more basic rules.
Senator Cynthia Lummis (R-Wyo.) And Kirsten Gillibrand (DN.Y.) A bill that presents a comprehensive framework It regulates the crypto industry and divides surveillance among regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The overall problem with Celsius is that almost 20% of the APY it was offering to its customers was impractical.
In a proceeding, Celsius has been accused of operating the Ponzi scheme. In this scheme, early depositors were paid money from new users.
Celsius has also invested in other platforms that offer very high returns as well to maintain its business model.
Report from the block Celsius found that he has invested at least $ 500 million in Anchor’s flagship lending platform, Anchor. Now failed US dollar pegstablecoin project terraUSD (UST). Anchor promised investors 20% annual interest rate held by UST— The rate at which many analysts said it was unsustainable.
Celsius was one of several platforms for depositing cash in anchors. This is a big part of why the major failure cascade was so important and swift after the collapse of the UST project in May.
“They always have to raise yields, so they move their assets to high-risk products that can’t be hedged,” said Nik Bhatia, founder of The. Bitcoin University of Southern California Finance Layer and Assistant Professor.
For the $ 1.2 billion balance sheet gap, Batia chokes it on a low-risk model and the fact that institutional investors have sold out collateral from below.
“They probably lost their customers’ deposits at UST,” Batia added. “When the price of an asset goes down, that’s how to make a’hole’. The risk model is still poor, as responsibility remains. “
It’s not just Celsius. Cracks continue to form in the lending corner of the crypto market. Castle Island Venture Carter withdraws all these net effects from crypto lenders as credits are destroyed and withdrawn, underwriting standards are tightened and solvency is tested. Say you are doing it.
“As we run out of credit, this has the effect of pushing up yields,” Carter said, saying he’s already seen this happen.
Carter hopes to see common inflation de-leveraging in the United States and elsewhere.
“But the parts of the industry that rely on the issuance of frivolous tokens will be forced to change,” he said. “Therefore, depending on the particular sector, I think the results will be non-uniform across the crypto space.”