Crypto Lending Platform Suspends Withdrawals, Stoking Fears Of Insolvency, Contagion

June 14, 2022
Celsius, one of the world’s largest crypto lending platforms, has announced that it has suspended all withdrawals due to “extreme” market conditions.

Celsius, one of the world’s largest crypto lending platforms, has announced that it has suspended all withdrawals due to “extreme” market conditions.

In the early hours of Monday morning (June 13), after the crypto markets had tumbled over the weekend, Celsius published a statement notifying its customers that their money is now effectively trapped within the platform.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts,” the statement said.

“We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations.”

Since last Friday’s close, the price of bitcoin and ethereum has dropped over 20 percent and 25 percent respectively.

Meanwhile, the Celsius platform’s native token, CEL, dropped more than 70 percent during the same period.

Overall, since hitting all-time highs in late 2021, bitcoin and ethereum have dropped over 65 and 70 percent respectively.

CEL, which hit an all-time high last summer, has since lost more than 97 percent of its value, sending its market cap from $1.8bn to $25m.

The general downturn in the crypto markets appears to be the primary cause of Celsius’ suspension of withdrawals, as the platform struggles to find the liquidity to enable customers to cash out their deposits.

As a lending platform, Celsius had enabled its customers to earn high interest rates on crypto-asset deposits, which Celsius would then lend out to borrowers to generate yield.

And the yields were high. Interest rates on stablecoins, for example, generally offered up to 7.1 percent per year, while interest rates on other crypto-assets were often double-digit.

For regular interest-bearing deposits, yields were paid to customers in the same currency as that which they had deposited.

However, if the customer opted to receive the yield in CEL tokens, the interest rate offered could be significantly higher.

At the time of writing, Celsius is still offering up to 18.63 percent annual percentage yield (APY) on selected crypto-assets held on the platform, with rewards paid out in CEL.

As of May 17, Celsius said it had more than $11.8bn in assets, and had processed about $8bn in loans.

Good times, bad times

In a rising market such as that offered by crypto for most of 2020 and 2021, the rates offered by Celsius were highly attractive.

Not only were customers holding crypto-assets whose prices were rising, but they were also getting paid interest for doing so.

In a downtrending market, however, particularly one that is falling as rapidly as crypto in the last six months, these rates make little sense, particularly the high yields paid out in the now collapsed CEL token.

Ultimately, these conditions meant that it became increasingly difficult for Celsius to fulfil its obligations to customers, whether that be its ability to service withdrawals or to meet interest payments.

For example, to generate high yields for customers, Celsius used a number of third-party services, including decentralised finance (defi) platforms such as Aave and Maker.

The value of Celsius’ collateral held on these platforms has been in freefall for most of the last six months, but rather than pay pack these loans and redeem the collateral, many of Celsius’ defi loans are still outstanding.

New loans have also been taken out more recently. On June 4, blockchain analysts claimed that Celsius had borrowed almost $100m from defi platforms over the previous 30 days to service withdrawals.

In some ways, Celsius is caught in a similar “death spiral” to that of LUNA, which was forced to sell off its own bitcoin reserves in an effort to raise cash to prop up its TerraUSD stablecoin.

But for Celsius users, some are now in an even worse position than Celsius itself, as they are unable to sell off their crypto-assets to pay down their open loan positions.

“I have USDC in my account that I want to use to repay my loan that has a margin call right now,” said one user on Twitter, “but I can't even repay the damn loan because of the transfer freeze.

“That's ridiculous. If the market tanks, Celsius will liquidate my collateral even though I can pay off my loan!”

Although many of Celsius’ customers may not realise it, they have no way to recoup their funds should Celsius go bust.

“In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations,” Celsius says in its Term of Use, “any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.”

Contagion risks

Little more than 24 hours have passed since Celsius announced its withdrawal freeze, but already its effects are being seen elsewhere in the crypto world.

Binance, the world’s largest crypto exchange by volume, announced that it had suspended bitcoin withdrawals citing an “on-chain transaction” error.

Tether, a shareholder in Celsius, also issued a statement attempting to dispel fears that the world’s largest stablecoin backer is overly exposed to the platform.

“While Tether’s investment portfolio does include an investment in the company, representing a minimal part of our shareholders equity, there is no correlation between this investment and our own reserves or stability,” it said.

“Also Tether lending activity with Celsius (as with any other borrower) has always been overcollateralised and has no impact on our reserves.”

However, Tether’s statement has so far failed to prevent jitters in USDT (Tether’s issued stablecoin), which fell about 15 basis points during trading on Monday.

Perhaps knowing the news that was about to hit, US crypto exchange Gemini also announced over the weekend that from June 15 it will begin charging a fee for all withdrawals.

Like Tether, Gemini is also directly exposed to Celsius, as Celsius holds about $100m in GUSD, a Gemini-issued stablecoin.

Nuri, a bank headquartered in Germany, uses Celsius to offer interest to customers on bitcoin deposits, and has informed customers that such deposits are now trapped.

Voyager Digital, a Toronto Stock Exchange-listed (TSX) digital asset platform, has also had a similar partnership with Celsius in place since October 2019.

Rivals and regulators

Although Celsius's partners are in damage limitation mode, its rivals are on the lookout for an opportunity.

Nexo, another major crypto lending platform, has already made a public offer to buy out “qualifying assets” from Celsius once its withdrawal freeze is lifted.

For regulators, Celsius’ actions will be seen as yet another strike against the crypto industry, which is barely a month out from its last high-profile, multi-billion-dollar collapse in the form of LUNA.

If Celsius survives, it may be looking at enforcement from the US Securities and Exchange Commission (SEC) similar to that of Blockfi, a fellow crypto lending platform that in February agreed to pay $100m in penalties due to unregistered securities violations.

In January this year, Bloomberg published a report claiming that the SEC is already scrutinising Celsius, Gemini and Voyager Digital for similar offences, according to a source who is familiar with the matter.

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