Celsius halts withdrawals, market reels

Celsius halts withdrawals, market reels

Celsius halts withdrawals, market reels

Cryptocurrency lending firm Celsius Network took to social media on Sunday night to inform its customers that it was suspending withdrawals from the platform until further notice.

In a blog post, the company stated that the action was being taken “due to extreme market conditions” and in an effort to “put Celsius in a better position to honor, over time, its withdrawal obligations”.

The blocking of users from their funds has re-raised the importance of using a non-custodial wallet.

Hindsight is 20/20

Everything is so much easier with hindsight but the signs were there that all was not well with the Celsius business model. The company’s recent plan to IPO its mining business during a bear market looked very much like a scramble for capital.

When Terra imploded last month, it emerged that Celsius was one of seven account holders that led the selloff that resulted in the demise of the algorithmic stablecoin. Although the company seemed to have liquidated its UST position without major loss, it was still being criticized for placing client funds in such a risky asset with an unsustainable yield.

Two weeks ago, Celsius added an ‘involuntary HODL mode’ to user accounts on the platform. The company claimed that the measure was necessary for increased account security. Critics of the company counter-claimed that it was a cynical move to make the funds withdrawal process much more cumbersome and time consuming for service users.

Risk of Contagion

There have been several voices in the crypto space that have been highly critical of these centralized lending platforms. Wall Street veteran and Custodia Bank founder Caitlin Long has said consistently that centralized entities offering yield on crypto was just a car crash waiting to happen. She likened availing of yield from businesses like Celsius to “picking up pennies in front of a freight train”. The issue is in offering these high yields, services such as Celsius have to fractionally reserve deposits and go further out the risk curve with clients' funds in order to create yield for clients and profit for themselves.

Whilst Celsius has found itself in the cross hairs, there is now renewed concern about similar lending platforms such as BlockFi and Nexo. Within minutes of Celsius announcing it was suspending withdrawals last night, BlockFi CEO Zac Prince took to Twitter to reassure its clients that all was well with the service. Prince said that BlockFi didn’t have any exposure to staked ETH ( stETH), unlike Celsius, which staked large amounts of ETH on the Beacon Chain through Lido Finance. stETH de-pegged some days ago already and it’s thought that Celsius’ position is too large to sell on-chain.

BlockFi agreed to pay a $100 million fine to the SEC earlier this year for misrepresenting the risks of the products that it offered. It’s understood the company is in the process of raising funds on the basis of a much lower valuation by comparison with previous funding rounds. Earlier this morning, Prince announced that the company is cutting headcount by 20%.

Nexo has published a letter of intent to acquire certain Celsius assets. It stated: “We firmly believe that acquiring all or part of Celsius’ qualifying, outstanding collateralized loan receivables will go a long way in providing immediate liquidity to @CelsiusNetwork clients”.

In 2021, Celsius borrowed $1 billion from stablecoin provider, Tether. In a statement issued earlier today, Tether said that Celsius’ current issues are of no concern as any loans to Celsius were overcollateralized. The fallout is likely to continue from this debacle. It’s understood that Celsius has a large DAI loan that it is trying to prop up with collateral. At the time of writing, if the Bitcoin spot price goes below $18,387.88, this position will be liquidated, adding fuel to the notion that Celsius may not emerge from this drama in a solvent state.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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