Celsius bid to rival Wall St with crypto lending scuppered by risky bets

Celsius Network co-founder Alex Mashinsky was in a defiant mood on Twitter this past weekend. When asked by one user why he had so many enemies, Mashinsky boasted: “because I am winning and giving it all to my community”. Days later, his crypto investment firm is in crisis after it blocked customer withdrawals, a move that shook crypto markets.

The abrupt halt in redemptions underscores the risks for investors who have piled in to complex digital asset products that offer high returns. Celsius claimed to have 1.7mn retail customers, including in the US, UK and Israel, and gained a reputation for making aggressive bets with its depositors’ money.

The investment group, which is broadly unregulated beyond lending licences in a handful of US states, had grown to as much as $24bn of crypto assets under management in December last year. It garnered a surge of inflows shortly after winning investment from Canada’s second largest pension fund, Caisse de dépôt et placement du Québec (CDPQ), and Westcap, a fund led by former Blackstone and Airbnb executive Laurence Tosi.

Celsius portrays itself as a simple company helping everyday investors achieve “financial freedom” unavailable in mainstream finance.

“Crypto is the first time in history that the average Joe is ahead of Goldman Sachs and Morgan Stanley,” Mashinsky said in a September interview with the Financial Times.

Celsius’s woes, however, lie in complex, risky trades typically hidden in the bowels of Wall Street.

The group, which was founded in 2017, rode the most recent crypto bull run to become one of the most prominent companies offering eye-popping yields of as much as 18 per cent to customers who deposited their digital assets. Similar to how a bank counts deposits as liabilities, Celsius customers are unsecured lenders, though in the lightly regulated crypto world they have no government-backed insurance for their funds.

Celsius deployed those deposits in loans to major crypto market makers and hedge funds, as well as into so-called decentralised finance projects. Several players in the market had a policy of not extending credit to Celsius even as they borrowed from it, according to people familiar with the matter.

As crypto prices tumbled this year, Celsius has been hit with withdrawals, totalling $2.5bn pulled from the platform since March. In May, the company had just $12bn in assets, half of where it started the year. It subsequently stopped disclosing total assets under management; however, CDPQ told the FT that Celsius endured a “strong volume of withdrawals” from customers in recent weeks. Celsius did not respond to a request for comment on Monday.

The crypto lender had also been challenged in recent months by several US state regulators, who argue its deposit accounts are unregulated securities. Celsius, in April, said it had been in “ongoing discussions with US regulators” and that as a result it would halt new deposits by US-based retail investors to its yield-bearing accounts.

The final squeeze came in the past week with a severe liquidity mismatch Celsius had created. The company borrowed ether — a major digital token — from users, and then locked huge sums of the asset up for an indefinite period in a new version of the cryptocurrency that is currently under construction and has experienced delays. Locking ether in the new version earned rewards that would eventually be released.

Celsius had locked the ether directly, but also through a service called Lido that issues a derivative of the locked ether, known as “staked ethereum” or stETH, which is meant to be easily tradeable and treated as a one-to-one equivalent to ether itself. It used that stETH as collateral for further borrowings, posting $450mn worth on a platform called Aave, according to public blockchain data.

Holders of stETH last week sold down the derivative over concerns about delays to the roll out of the new Ethereum network, the main digital ledger where ether trades. The sell-off has drained liquidity from the main trading pool for the derivative, leaving Celsius unable to swap its stETH for ordinary ether to meet customer withdrawal requests without incurring huge losses, according to crypto analysts.

Compounding the challenge is the threat that it could be forced to post additional collateral on Aave or be liquidated on its borrowings if the price of stETH continues to fall.

The group on Monday said it would pause withdrawals due to “extreme market conditions”, saying that the decision was made to place Celsius “in a better position to honour, over time, its withdrawal obligations”.

The company’s own crypto token, CEL, has plummeted in the wake of its recent troubles to just 30 cents. It traded at nearly $8 last June. The broader crypto market has also been hit by Celsius’ troubles, with bitcoin down about 25 per cent since Friday to trade below $23,000.

Celsius has managed to pull itself out of previous tight spots, all of which have been detailed by a growing band of critics online who have for months warned of the risks Celsius was taking. Among them was an American blogger, CJ Block, who writes under the pseudonym Mike Burgersburg, and a bitcoin entrepreneur Cory Klippsten.

“They were putting their money into all sorts of risky bets . . . at the best they were like a hedge fund using retail money,” said Block, who recently finished medical school after spending months analysing Celsius’s positions using blockchain data.

In May, Celsius pulled $500mn from the Terra ecosystem shortly before it collapsed, contributing to the rush to the exits that pulled down the terra stablecoin and its linked luna token. The company had a tougher time last year when it lost 900 bitcoin it had deposited with a crypto venture called the Badger DAO that was then hacked. Celsius was also the holder of large amounts of stETH issued by another company, Stakehound, which became practically worthless when Stakehound lost the keys to the underlying ether.

Max Boonen, founder of the crypto broker B2C2, likened crypto lenders to banks that have to carefully match their assets and liabilities to remain solvent.

“Banks have learned from past crises and are now pretty careful and sophisticated about their asset-liability mismatches. It’s a skillset and I don’t know to what extent the crypto lending market has learned it yet,” he said.

Additional reporting by Josephine Cumbo