Last Monday Celsius Network, one of the largest cryptocurrency lending platforms globally, announced that they were blocking customer withdrawals and transfers. The fall of Celsius coupled with the rise of a recession globally has pushed the cryptocurrency sector below a $1 trillion valuation for the first time since January 2021 and has led to Bitcoin plunging by about 45 per cent in the last couple weeks, to trade as low as $17,700.
Founded in 2017, Celsius offers interest on cryptocurrency deposits, as well as loans to individual investors and institutions alike. Although exhibiting many similarities with a traditional bank in the way they operate, Celsius co-founder Alex Mashinsky has been a vocal critic of banks, as well as banking and securities laws in the past, having claimed that “banks are not your friends.”
As a business, Celsius rely on constantly having enough liquidity to ensure that their obligations for withdrawals and deposits are met, while maintaining their ability to offer interest rates as high as 18% on certain cryptocurrencies. To do this, Celsius have invested in many speculative, high-risk plays in the past.
Celsius are reported to have had heavy exposure to the Ethereum 2.0 protocol, due to launch sometime in the summer of 2022. Celsius are rumoured to have staked Ethereum directly for a certain lock-up period for a return, and purchased “staked Ethereum” or stETH, a liquid derivative of the original Ethereum, initially interchangeable at a 1:1 rate.
It is speculated that Celsius purchased $450 million worth of stETH. This in turn was deposited onto Aave as collateral for further loans, making Celsius the largest interest bearing holder of stETH on the lending platform.
Although initially successful, rising concerns regarding Ethereum 2.0’s launch date coupled with uncertainty over stable coins in the aftermath of the collapse of UST resulted in a bank run on stETH. Individuals en masse sought to exchange their stETH back into Ethereum, which in turn depegged the value of stETH to Ethereum on the 13th of May.
At present stETH sits at 0.94 ETH, having been unable to recapture its peg. This has resulted in Celsius suffering large losses, and requiring ever greater liquidity to reinforce their positions on Aave, or face liquidation.
As rumours spread that Celsius were directly impacted by such events, withdrawals from their platform skyrocketed, further compounding the issue. This finally culminated in Celsius' decision to suspend all withdrawals and transfers from their platform, citing “extreme market conditions.”
This has left thousands of investors unable to retrieve the assets they have stored with Celsius and unaware as to whether they will ever be able to recover them. Celsius state the following in their terms and conditions:
“In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and 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.”
Celsius have highlighted the need for individuals to utilise adequate risk management strategies, to remain cautious of where their funds are invested by centralised exchanges and to further reinforce a timeless principle in the cryptocurrency space; not your keys, not your crypto.
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