FT Cryptofinance: Celsius’s fall into bankruptcy and the future of crypto

Hello and welcome to the inaugural edition of the Financial Times Cryptofinance newsletter. My name is Scott Chipolina, digital assets correspondent. I’ll be here every Friday bringing you the intelligence you need on the digital finance industry.

I’ll be examining the most important trends in crypto, briefing you on the fast-moving regulatory landscape, detailing how companies are using innovations such as blockchain in their operations and bringing you insights from industry executives. Don’t expect too many updates on which coins are up or down this week — we’re going to dig deep on the stories that matter most to investors.

Story of the week: Celsius turns from crypto high flyer to bankruptcy petitioner

Celsius’s fall from the heights of the crypto industry to US bankruptcy court highlights many of the most important challenges the digital finance industry faces as the era of easy money that propelled its growth comes to an abrupt end.

The US-based crypto lender earlier this week filed for Chapter 11 bankruptcy protection as it revealed a $1.2bn hole in its balance sheet, caused by what chief executive Alex Mashinsky described as “poor” investments and other “unanticipated” losses.

Celsius, which was founded in 2017, became one of the most prominent firms in crypto by offering annualised interest rates as high as 18 per cent. It was able to offer these yields — which are almost unheard of in traditional finance — by making risky bets with its depositors’ money, as my colleagues Kadhim Shubber and Joshua Oliver detailed in a must-read story this week. The strategy allowed it to pull in billions of dollars’ worth of inflows during the crypto bull run that was part-fuelled by the race for yield ignited by central banks’ pandemic-era stimulus programmes.

The company’s rise to prominence, which took place with almost no supervision from regulators, caught the eye of major investors. Canadian pension fund manager Caisse de dépôt et placement du Québec and WestCap, a fund set up by former Airbnb and Blackstone executive Laurence Tosi, led a fundraising round in Celsius in October that valued the group at $3bn. 

Alexandre Synnett, chief technology officer at CDPQ, told the Financial Times at the time that the investment signalled “the conviction that we have is around the blockchain technology”. 

Less than a year later, Celsius blocked customers from taking funds off of its platform after ructions in the crypto market blew a hole in its finances. Other crypto lenders such as Vauld, a group backed by Coinbase and investor Peter Thiel, have similarly blocked redemptions as the credit crisis in the digital asset market intensifies.

The woes for Celsius and its peers bring to light a series of issues that could define the trajectory of the digital finance industry. How much responsibility should regulators have for protecting consumers who use crypto platforms? Should crypto tokens be supervised like securities, commodities, or something completely different? Should mainstream fund managers dabble in crypto?

The FT’s Lex column, meanwhile, points out that Celsius’s bankruptcy will raise important questions from lawyers, creditors and the courts on how exactly digital finance companies operate.

The troubles in the crypto industry also come during a time of wider market tumult. What will investors’ rush away from speculative assets mean for the digital finance industry at large, and the thousands of crypto tokens currently circulating on the market?

I’d like to hear from you. What do you view as the most important issues and questions in digital finance right now? Email me at scott.chipolina@ft.com. 

The week’s highlights

• Alan Howard, a media-shy hedge fund billionaire, is quietly building a digital assets empire and has become a major force in crypto venture capital in the US and Europe in the process.

• Crypto investors should take the market crash as a “cautionary lesson” about putting money into risky unregulated assets and cannot count on any kind of a bailout, Europe’s top securities regulator has said.

• Brokers offering share trading and crypto exchanges selling digital tokens are making advances on each other’s customers as the fervour that propelled retail trading volumes into trading cools.

• FT columnist Jemima Kelly argues that Web3 is not about making the internet fairer or less liable to exploitation by greedy fat cats — it’s actually the very opposite. While we’re on that subject, make sure not to miss the FT’s Big Read on whether the crypto crash will derail the next web revolution.

• Popular non-fungible token marketplace OpenSea announced that it plans to slash 20 per cent of its workforce, marking the latest in a very long line of crypto lay-offs.

Sound bite of the week

Financial Conduct Authority chief executive Nikhil Rathi said the UK and US are unlikely to be able to accept China’s digital currency over concerns about privacy and citizens’ data, FT European banking correspondent Owen Walker reports. China is one of the world’s leaders in building a state-backed digital currency, so it’s worth keeping a close eye on how this develops.

“There are going to be really significant societal questions of data privacy. So I would be surprised if our jurisdiction — or indeed [the US] — would be able to adopt an approach to citizens’ data privacy that has been adopted in the Chinese model. I think our citizens just have different expectations there.”

Data Mining

The flow of funds through crypto mixers, tools that obscure the trail of transfers that would typically be publicly accessible on the digital ledgers that underpin cryptocurrencies, has risen rapidly this year. In the second quarter, $800mn in illicit funds were sent to these products, up 180 per cent from the first three months of 2022, according to blockchain analytics platform Chainalysis. The increase highlights how crooks are turning to new tools to hide their tracks as law enforcement authorities become increasingly sophisticated at following the money on public blockchains.

It’s also worth noting that Chainalysis’s data found the source of funds sent to mixers is overwhelmingly coming from North Korea, demonstrating the country’s underground crypto economy is alive and well.