The decision by beleaguered cryptocurrency bank Celsius to halt withdrawals from its nearly 2 million users rattled crypto markets on Monday and underscored fears that some of the industry’s biggest firms are on grounds fragile finances.
“Due to extreme market conditions, we are announcing today that Celsius is suspending all withdrawals, exchanges and transfers between accounts,” the company, officially called Celsius Network, said in a statement on Sunday.
“We are taking this action today to put Celsius in a better position to meet, over time, its withdrawal obligations.”
In simple terms, this means that people who have deposited money with Celsius to reap its reputedly high returns cannot, at this time, withdraw it.
The company says it has 1.7 million users and holds about $8 billion in deposits, which are now frozen.
No timetable has been proposed for the reinstatement of the withdrawals.
The news sent the biggest cryptocurrencies plunging – bitcoin fell 12% late Monday afternoon and ethereum plunged 13%.
There’s kind of a feedback loop here; it was a drop of more than 10% for each currency in the days leading up to the announcement that likely contributed to Celsius’ liquidity issues in the first place.
Overall, bitcoin is down 23% in the past five days, while etherium is down 30% over that time; both are now at their lowest prices in nearly 18 months.
Celsius’ own coin, meanwhile, fell from a high of $7 last year to 21 cents.
Also on Monday, Binance, one of the largest crypto exchanges in the world, briefly halted trading.
It was unclear if liquidity was a factor – the company blamed a “stuck transaction” and said Monday afternoon it had largely 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 extremely high returns to those who deposit crypto into it.
Before the shutdown, this rate was 18.6%, a multiple of several times that of traditional banks and has in the past climbed to 30%.
This has led critics to say he doesn’t have the assets on hand to back up deposits if enough investors ask for their money.
Over the past year, state governments have asked many of the same questions.
Last September, the New Jersey Bureau of Securities sent the company a cease-and-desist letter, while Alabama and Texas also asked it to answer questions about its liquidity.
(The company has offices in New Jersey, as well as Europe and the Middle East.)
The New York Attorney General has also requested more information about Celsius’ activities.
The New Jersey letter noted that Celsius “did not disclose to investors the amount of money spent on each of (its) investment activities” or “the nature and creditworthiness of the borrowers.”
He said his goal was “to stop the supply 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, if a bank of crypto runs out of 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 the challenges.
In the past, Celsius has borrowed up to $1 billion from Tether, the dollar-pegged “stablecoin,” to ensure liquidity. Tether itself has generated questions about whether it has enough asset backing.
And it was Celsius trading that some experts say caused the crash last month of the Terra stablecoin, which in turn fueled a bigger crypto slide that rocked much of the market, including Celsius.
Stephen Diehl, a London-based software engineer who leads a campaign by technologists against crypto in Washington, has blamed any potential Celsius outcome on the government’s doorstep.
“Unfortunately, this is a regulatory failure on the part 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 returns above 20% without any economic activity are basically just a new form of Ponzi scheme. It’s just a shame that so many retail investors lose everything when it was completely avoidable. »
Other crypto skeptics warn of a potentially bigger reckoning — perhaps even on par with the so-called “crypto winter” in 2018, when Bitcoin lost two-thirds of its value as investors faltered. were fleeing.
This event wiped out much of the paper wealth of crypto players, before new money returned in 2021 and sent many currencies to all-time highs.
The possibility of contagion to the wider economy from Celsius stock appears limited, although there may be potential downstream effects on Canadian pensioners.
CDPQ, one of the largest pension funds in the country, 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 to do as we consider various options,” he said. “There may be delays,” he added, but maintained “Celsius has valuable assets and we are working diligently to meet our obligations.”