A decision by embattled cryptocurrency bank Celsius to halt withdrawals by its nearly 2 million users rattled crypto markets Monday and underscored fears that some of the sector’s largest companies are on shaky financial ground.
In layman’s terms, this means that people who deposited money with Celsius to reap its famously high returns can’t, for the time being, get it out. The company says it has 1.7 million users and is believed to be holding about $8 billion in deposits, which are now frozen.
No timetable was offered for when withdrawals would be restored.
The news caused the largest cryptocurrencies to plunge — bitcoin dropped 12 percent as of late Monday afternoon and ethereum plunged 13 percent. There is a feedback loop of sorts here; it was a drop of more than 10 percent for each currency in the days before the announcement that probably contributed to Celsius’s liquidity issues in the first place.
Overall, bitcoin is down 23 percent in the last five days while ethereum has plummeted 30 percent during that time; both now sit at their lowest prices in nearly 18 months. Celsius’s own coin, meanwhile, has dropped from a high of $7 last year to 21 cents.
Also on Monday, Binance, one of the world’s largest crypto exchanges, briefly halted trading. It was unclear if liquidity was a factor — the company blamed a “stuck transaction” and said Monday afternoon it had mostly been resolved.
Celsius is a “decentralized” or “DeFI” bank that lends and borrows crypto much like a financial institution does for dollars, but without much of the usual banking infrastructure.
Celsius offers exceedingly high returns to those who deposit crypto with it. Before the halt, that rate was 18.6 percent, a multiple many times that of traditional banks and has in the past climbed as high as 30 percent. That has led critics to say it does not have the assets on hand to back up the deposits should enough investors demand their money back.
In the past year, state governments have asked many of the same questions. Last September, New Jersey’s Bureau of Securities sent the firm a cease-and-desist letter, while Alabama and Texas have also demanded it answer questions about its liquidity. (The firm has offices in New Jersey, as well as Europe and the Middle East.) The New York attorney general also has requested more information on Celsius’s business.
The New Jersey letter noted that Celsius did “not disclose to investors the amount of money devoted to each of [its] investment activities” or “the nature and creditworthiness of the borrowers.” It said its goal was “halting the offer and sale of these unregistered securities.”
Unlike traditional banks, crypto lenders have no regulatory requirement to demonstrate sufficient assets, while investors have no protection from the Federal Deposit Insurance Corp., which insures deposits in banks, should a crypto bank lack funds during a run.
A high level of interconnectedness also prevails with crypto, with many companies borrowing from or investing in each other. This potentially amplifies challenges.
Celsius in the past has borrowed as much as $1 billion from Tether, the “stablecoin” pegged to the dollar, to assure its liquidity. Tether has itself generated questions about whether it has sufficient asset backing.
And it was trades by Celsius that some experts believe caused the crash last month of Terra’s stablecoin, which in turn fueled a larger crypto plunge that has roiled so much of the market including Celsius.
Stephen Diehl, a London-based software engineer who is leading a technologist campaign against crypto in Washington, laid the fault of any potential Celsius unraveling at the door of the government.
“Sadly it’s a regulatory failure on behalf of the SEC,” he said in a message to The Washington Post. “There were red flags on this company for years and they did nothing. These protocols that promise 20%+ yields from no economic activity are basically just a new form of Ponzi scheme. It’s just a shame so many retail investors are going to lose everything when this was very preventable.”
Other crypto skeptics warn of a potentially larger reckoning — perhaps even on par with the so-called “crypto winter” in 2018, when bitcoin lost two-thirds of its value as investors fled. That event wiped out a lot of paper wealth for crypto players, before new money poured back in during 2021 and sent many currencies to all-time highs.
The possibility of contagion to the larger economy of the Celsius action appears limited, though there could be potential downstream effects on Canadian pension-holders. CDPQ, one of that country’s largest pension funds, is an investor in the lending platform.
Celsius sought to reassure investors in its statement while offering few commitments.
“There is a lot of work ahead as we consider various options,” it said. “There may be delays,” it added, but maintained “Celsius has valuable assets and we are working diligently to meet our obligations.”