Five things you need to know about the Celsius crypto lending crisis

Cryptocurrency trading platform Celsius has clearly demonstrated that the fears of many institutional investors regarding the infrastructure of the cryptocurrency market are justified. It was also something the SEC focused on in its deliberations on whether cryptocurrency markets needed more regulation. Ultimately, much of the existing “nuts and bolts” of the crypto market was built by tech specialists rather than financial market professionals. That seems to be where it’s coming off.

#1. What happened to Celsius?

Celsius Network was created to allow users to lend and also receive credit in cryptocurrencies. It has been operational since 2017. It has successfully raised over $50 million through an ICO, an asset which itself is currently beaten. Although originally registered in the UK, it left these shores due to regulatory uncertainty surrounding the FCA’s stance on cryptocurrency. The company paid crypto owners very attractive interest rates – for example 17% – if they deposited their coins on its platform. Like a bank, Celsius also lent coins to other platforms and traded on its own account. This means that there is a risk that although he has subscribed to liquidity in the market, he does not yet own all the coins that have been deposited with him. The company announced earlier this week that it was freezing the assets of its users.

#2. How many people have been affected – and what can they do?

Current estimates indicate that Celsius has around 1.7 million users. Many have already redeemed their assets in recent weeks as major cryptocurrencies have continued to sell off. But now Celsius has lowered the shutters. Celsius is entitled under the terms of its user agreements to initiate freezing. The loans to Celsius are unsecured – there is currently no legal recourse to recover them, although we expect Celsius’ legal department to be very busy this summer. Celsius has worked to distance itself from banking regulations to prevent governments from expecting it to seek a banking license and fall foul of bank insurance, whether in the United States or elsewhere.

#3. What are the implications for the cryptocurrency market?

Bitcoin fell over 20% to a low of $20,800 at the start of this week. Since the crypto rally in November in response to the launch of the Bitcoin ETF Futures product, the crypto has been on a relentless downward trend with few signs of relief. The market rightly fears the potential impacts of Celsius’ insolvency, while still having billions in assets under management. The decline in their assets under management has been remarkable, dropping from $28 billion in November to around $3 billion today. But we see these as teething problems for the market. This is the first time it has been tested by a major bear market. Questions are being asked of the platforms that they simply haven’t had to answer before. These events, like the financial crisis in 2008, will demonstrate who has the solid foundations needed to operate responsibly in this market.

#4. What about lending strategies?

Celsius’ liquidity issues raise serious concerns about high yields on many lending platforms, and crypto critics will feel more confident in their opinion of DeFi’s legitimacy. Investors should be careful with loan companies offering lucrative double-digit returns on assets like Bitcoin and Ethereum. Market participants should consider the risks involved, such as smart contract exploits, lender insolvency, and whether the protocol has been stress tested. We are still in the initial phase of crypto, where many DeFi products are tested and selectivity will lead to many failures along the way.

#5. Will the drop affect other platforms like Celsius?

We are seeing impacts across all centralized lenders, such as BlockFi is also facing problems. They announced in a blog post on Tuesday that they were laying off 170 to 200 employees, or 20% of the lender’s total workforce. This follows a series of established crypto companies decreasing the number of employees, due to the continued chaos occurring in this market downturn. CEO of Crypto.com, Kris Marszaleksaid Friday that the company was laying off about 260 employees.

However, unfortunate events with lenders like Celsius and other crypto companies will not stop savvy investors from investing directly in traditional cryptocurrencies. The intrinsic value of borderless, permissionless, blockchain-native assets will continue to thrive in the long term.

With thanks to Marcus Sotiriou, analyst at GlobalBlock in the UK for his contribution to this article.

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Janet E. Fishburn