Why crypto lender Celsius Network halted withdrawals
Celsius, which offers high-yield returns on customer deposits, is the latest cryptocurrency company to fail as a result of the tightening financial conditions. It happens less than a month after the Terra-Luna stablecoin network collapsed.
Celsius functions much like an unregulated bank in that it offers consumers high-interest rates in exchange for cryptocurrency deposits and then proceeds to lend out those deposits to other Celsius users. Celsius claims that its loans are collateralized in Bitcoin (though not all of them are), and there is no guarantee that it will be able to pay out customers in the event of a rush of withdrawals. This is especially concerning given that the price of Bitcoin has decreased by forty percent over the course of the past year.
Alex Mashinsky, co-founder and CEO of the company, has spent years condemning detractors for promoting "FUD," which stands for "fear, uncertainty, and doubt" over the liquidity of Celsius Network's cryptocurrency.
Mike, do you know even a single person who struggles to withdraw from Celsius? On June 11, Mashinsky posed this question to venture capitalist Mike Dudas through Twitter. Why do you continue to spread FUD and misinformation?
Celsius put a halt to withdrawals the following day, on June 12, citing "severe market conditions" as the reason. Since then, the value of CEL, a coin that was issued by Celsius, has decreased by 32%.
But, what is Celsius Network, exactly?
PitchBook reports that Celsius Network had a valuation of $4.1 billion following the conclusion of its most recent Series B investment round. Celsius Network is a sizable cryptocurrency company that is supported by venture capital. However, since November, the total value of the cryptocurrency market as a whole has decreased by more than 60 percent, resulting in a loss of market capitalization of $1.6 trillion, as reported by CoinMarketCap.
A shocking proposition in comparison to traditional banks, which, according to the Federal Deposit Insurance Corporation, currently offer a 0.07 % annual yield for savings accounts on average in the United States, Celsius provides its customers with an annual yield on deposits of 17 percent, making the company one of the most profitable.
Crypto lenders such as Celsius are not regulated in the same way that traditional banks are, and they do not have fundamental protections such as deposit insurance. Deposit insurance has been an essential component of US banking regulation ever since the FDIC was established in 1933 in response to the Great Depression.
"The crypto business is repeatedly learning all of the old lessons from traditional banking," said Todd Phillips, a former FDIC lawyer who is now the Center for American Progress's head of financial regulation and corporate governance. "It's unfortunate because if we had just paid attention to the past, a lot of the hurts and losses that have occurred here could have been avoided."
So, what about Celsius regulating crypto lenders?
There has been a run of failures in the crypto lending industry, and it is abundantly evident that these companies need fundamental laws in order to protect their customers. The most recent of these disasters was Celsius.
The cryptocurrency lending platform Cred apparently took out some risky loans, which reportedly led to its demise in the year 2020. The stablecoin TerraUSD and its sister coin Luna were both destroyed in May 2022 when a large number of clients withdrew their funds from the Anchor Protocol, which provided customers with payouts of 20% in a manner analogous to TerraUSD.
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