Celsius Network Ltd, a platform specializing in crypto lending, has stopped paying out balances, trading, as well as transfers. The announcement cited "extreme market conditions" and sparked investor concerns regarding the company's potential insolvency.
The platform is one of the largest players in the emerging crypto lending space. As of May, the company had lent more than $8 billion to customers and managed nearly $12 billion in assets, on which it paid out annual interest rates of up to 18%. Celsius can essentially be described as the crypto equivalent of a bank - but without the strict insurance requirements that traditional lenders are subject to.
Market turbulence becomes a doom
A recent report by blockchain analytics firm Nansen shows that Celsius Network and a handful of other institutional investors deposited amounts in the hundreds of millions in the Terra algorithmic stablecoin "UST" and withdrew them during the collapse. How much the platform actually deposited on the Anchor savings protocol is unknown. But without sufficient hedging and risk management, this could have led to massive losses for Celsius.
In addition, there is the decoupling of the liquid staking protocol Lido Finance. In essence, the project tokenizes tokens that are deposited into the staking contract of a protocol. For example, Lido Staked Ether (stETH) represent ether that have been injected 1:1 into the Ethereum staking contract. This allows users to receive staking returns on a liquid token that can be used in DeFi applications. However, due to various concerns, stETH began to lose its ties to "real" Ether in early May. With hundreds of millions of dollars in stETH that was supposed to pay customers a 6 percent return on their Ether, this led to liquidity issues for Celsius.
Withdrawals and transfers still frozen
Celsius announced the withdrawal freeze in a memo to its customers. A precise reason was not revealed; the measure was simply intended to put the company in a better position to meet its withdrawal obligations.
"Celsius has valuable assets and we are working diligently to meet our obligations. We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets." - Memo an die Celsius Community
Because services like Celsius are often marketed as alternative savings accounts, regulators have argued for some time that high-yield crypto accounts constitute unregistered securities. This would warrant greater disclosure and oversight of investors. Regulators in various U.S. states have already taken legal action against Celsius Network, while the SEC ordered competitor BlockFi to pay $100 million in fines.
Nexo offers an acquisition
The possible imminent insolvency of Celsius prompted a competitor to announce a potential bid for the assets. Nexo, a Swiss rival based in Zug, expressed interest in the entire loan portfolio and submitted a formal letter of intent to the troubled company. According to the announcement, Nexo wants to buy all remaining and qualifying assets, but especially their secured loan portfolio.
Nexo is in а solid liquidity and equity position to readily acquire any remaining qualifying assets of Celsius, mainly their collateralized loan portfolio. We are putting together an offer to Celsius to that accord and will communicate it publicly. 5/
— Nexo (@Nexo) June 13, 2022
The offer was made without specifying a price and is valid for one week. During this time, Celsius is to reject or agree to the offer. Nexo also reserves the right to withdraw until then. So far, Celsius has not commented publicly, but rumor has it that the offer has already been rejected.
Are Celsius customers facing a bail-in?
Without the protection of deposit insurance and the ability to obtain liquidity from a central bank, Celsius' 1.7 million users are not 100 percent assured of getting their money back. According to the terms of service, customer funds deposited into Celsius' earn and borrow services cannot be reclaimed in the event of bankruptcy.
"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." - Terms of use of the platform
Indeed, a deposit into the mentioned accounts transfers all rights and title to the digital assets, including ownership rights. However, the extent of the company's liquidity problems are still unclear, and no hasty conclusions should be drawn. Even if Celsius resumes operations, it will hopefully encourage all users to return to the original benefits of decentralized blockchain systems.
