Will the Celsius Crisis Trigger A "Total Reshuffle" in the Crypto Sector?

Celsius, the leading cryptocurrency lending platform, made an abrupt announcement on June 12 local time, claiming that all user withdrawals, swaps and transfers are suspended because of "extreme market conditions". Earlier, Fazzaco has covered the news​. 

Right after the announcement, bitcoin saw a plunge since the 13th, and hit a new low at US$20,835 in the last 18 months by 14th. A moderate rebound came out, and the price is now fluctuating around US$22,000 before the writing of this article. ETH fell too, to its lowest point on the 14th at only US$1,096.24.

Will this be the precursor of the gravest crypto crash since '18?

The slump of cryptocurrency price is probably the most painful one since 2018, when bitcoin was cut by 80%. However, some pointed out that the impact of this plunge will be even broader and far-reaching, since there are more people and institutions buying and holding cryptocurrencies since the Covid outbreak in 2020. Some even compared it to the time when the 2008 global financial crisis was imminent.

Celsius, the company that some believed sparked the price drop, has been a leading cryptocurrency lending platform. As an alternate investment, crypto lending refers to a way of investment in which an investor lends out cryptocurrencies for interest. The alternate investment is closely tied to DeFi and blockchain.

As a form of loan, there are, of course, lenders and borrowers. Both parties go to a third party like Celsius or Binance where the lender grants the loan in exchange for interest, while the borrower deposits assets in digital form as collateral, which can be used to offset the lender's loss in case the borrower is unable to pay back.

Cryptocurrency loan became something popular in the last few years because loan interests are quite profitable and lenders may use this as a way to balance out volatility loss. Three figures, though, are critical here: First of all, Celsius is said to have offered loans worth of US$8 billion to clients by May 2022; second of all, Celsius has been managing assets worth of nearly US$12 billion (though shamefully dwarfed by its prime time when it managed over 26 billion); and third, Celsius claims to have as many as 1.7 million users. Many of these users have been lured into depositing their digital coins there. So, Celsius looks like a massive crypto "bank" judging from its sheer size.

Alex Mashinsky, the CEO of Celsius, astonished everyone with his unimaginably crazy stunt, and caused great panic among investors.

What's more, Fazzaco has learned that Celsius has hired liquidation lawyers to advise on potential solutions to the growing financial problems​. The company is said to look to seek possible financing options from investors first, but it also explores other viable options, including a viable financial restructuring.

"Not your keys, not your coins" - Heated discussions in the industry

Fazzaco noticed that many people in the crypto business have made their voices heard on LinkedIn regarding the incident. The vast majority vehemently expressed their protests and criticisms of Alex Mashinsky's decision to avoid massive run-on-bank by suspending withdrawals.

Many quoted a trending meme in the crypto business in their comments, "not your keys, not your coins", allegedly originated from Andreas Antonopoulos, a bitcoin advocate. That is to say, to literally own your bitcoins, you need to own their private keys, and all those bitcoins you deposit at the crypto exchanges are not yours.

Some comments delivered the straightforward outrage on behalf of investors against Celsius. "Shame on you, Alex Mashinsky! SHAME! I hope you realize this is the end of your little platform, even if you end-up re-launching withdrawals. Nothing can buy back community's broken trust and I think it's safe to say we all had enough," commented Lyuba, the Senior Legal Consultant at Paysafe.

"They can do this because they own your deposits - not you. When Celsius clients open accounts they sign agreements transferring their assets to Celsius. They also make very clear in their contracts that they are not a bank, that your account is not a bank account and that you have no rights normally associated with bank accounts - rights like ownership and access. They were very upfront about this and people signed over their 'assets' left right and centre because they wanted the unrealistic payout promises," commented Lesili-Ann Lancaster, a former CFO at Tandem Innovation, "this is where greed gets you. It was always too good to be true."

Early signs of the Celsius Crisis? / Is massive run-on-bank just a matter of time?

As a matter of fact, Celsius has been on the radar of U.S. regulators largely because of the company's alleged sales of unregistered securities to investors. Although Celsius, the accused, said it is negotiating a settlement with relevant regulators, several U.S. states still took action against the company in 2021. Two months ago, Celsius announced that U.S. investors could not engage in investments related to cryptocurrency deposits.

Shortly after Celsius announced the suspension of withdrawals, Fazzaco reported that Nexo, another cryptocurrency lending platform, offered Celsius to acquire its assets​. But Nexo later said that while the company reached out to Celsius, it was rejected, saying Celsius' equities and liquidity were in good shape.

This reaction from Celsius added fuel to the panic in the market. Due to the many loopholes in cryptocurrency regulation itself, it is impossible to effectively prevent the occurrence of large-scale runs, which will undoubtedly bring huge pressure on the price of the entire cryptocurrency. We may witness a large-scale crypto version of run-on-bank in the future.

Will Tether be brought to a liquidity crisis?

After the "death spiral" of the stablecoin UST and its sister token LUNA in mid-May, the Celsius crisis has aroused market vigilance too. In particular, will Tether Ltd, the issuer of the world's largest stablecoin Tether be involved as a shareholder of Celsius?

After the Celsius announcement, Tether hurriedly issued a statement to disentangle the relationship between the two, saying that the company's investment in Celsius only accounted for a small part of its portfolio and shareholders' equities, and the investment does not affect Tether's reserves and stability. With such a vague statement, however, the market remains uncertain on how much of a risk Tether is facing.

If Tether finally fell into a crisis of liquidity dry-out, will there be a full-scale bloodshed in the crypto sector just like the global subprime mortgage crisis in 2008? Will Celsius be the second Bear Stearns? Who can manage to escape unscathed?