From $25 billion to $167 million: How a major crypto lender collapsed, taking many investors with it – CNBC | Vette Leader

The fact that Celsius filed for bankruptcy this week came as a surprise to virtually no one. Once a platform freezes customer assets, it’s usually over. But while it was expected, it remains a really big deal for the industry.

In October 2021, CEO Alex Mashinsky said the crypto lender had $25 billion in assets under management. As recently as May — despite plummeting cryptocurrency prices — the lender was managing around $11.8 billion in assets, according to its website. The company had another $8 billion in customer loans, making it one of the biggest names in crypto lending in the world.

Now Celsius is down to $167 million “in treasury,” which it says will provide “ample liquidity” to support operations through the restructuring process.

According to the bankruptcy filing, Celsius now owes its users around 4.7 billion US dollars – and there is a gap of around 1.2 billion US dollars in its balance sheet.

It shows that leverage is a hell of a drug, but the moment you’re sucking out all that liquidity, it’s a lot harder to keep the party going.

Celsius’s fall marks the third major bankruptcy in the crypto ecosystem in two weeks and is being billed as crypto’s Lehman Brothers moment – comparing the contagion effect of a failed crypto lender to the fall of a major Wall Street bank, which ultimately predicted the fall of the 2008 mortgage debt and financial crisis.

Regardless of whether the Celsius implosion portends a major collapse of the larger crypto ecosystem, the days of clients earning double-digit annual returns are over. For Celsius, the promise of those big yields to bring new users on board is a big part of what led to its eventual demise.

“They subsidized it and took losses to get customers in the door,” said Castle Island Venture’s Nic Carter. “The returns on the other end were fake and subsidized. Basically, they were withdrawing returns [Ponzi schemes].”

Who gets their money back

Three weeks after Celsius halted all withdrawals due to “extreme market conditions” — and days before the crypto lender finally filed for bankruptcy protection — the platform was still touting large, bold text on its website with annual returns of nearly 19%, which was paying off weekly off.

“Transfer your crypto to Celsius and you could earn up to 18.63% APY in minutes,” the website read on July 3.

Promises like these helped attract new users quickly. Celsius said it had 1.7 million customers as of June.

The company’s bankruptcy filing reveals that Celsius also has more than 100,000 creditors, some of whom have lent cash to the platform without collateral to back the arrangement. The list of the top 50 unsecured creditors includes Sam Bankman-Fried’s trading firm Alameda Research and a Cayman Islands-based investment firm.

These creditors are likely first in line to get their money back should there be a haul — with mom and pop investors holding the bag.

After filing for bankruptcy, Celsius clarified that “most account activity will be paused until further notice” and that it is “not seeking authority to allow customer withdrawals at this time.”

The FAQ goes on to state that award accumulation will also be halted by Chapter 11 bankruptcy proceedings and customers will not receive award distributions at this time.

That means customers trying to access their cryptocurrency are out of luck for now. It is also unclear whether customers will ever be able to recover their losses as part of insolvency proceedings. If there is some kind of payout at the end of a process that may take several years, the question also arises as to who would receive it first.

Unlike the traditional banking system, which typically insures customer deposits, there is no formal consumer protection to protect users’ funds if something goes wrong.

Celsius states in its Terms of Service that any digital asset transferred to the platform constitutes a loan from the user to Celsius. With no collateral provided by Celsius, client funds were essentially just unsecured loans to the platform.

Also, in the fine print of Celsius’ Terms of Service, there is a warning that in the event of bankruptcy, “any eligible digital assets used in the Earn service or as collateral under the Borrow service may be non-refundable” and that customers “may not have”. any remedy or right in connection with Celsius’ obligations.” The disclosure reads like an attempt at blanket immunity from legal wrongdoing should things ever go wrong.

Another popular lending platform for retail investors with high-yield offerings is Voyager Digital, which has 3.5 million customers and also recently filed for bankruptcy.

To reassure their millions of users, Voyager CEO Stephen Ehrlich tweeted that After the company went through bankruptcy proceedings, users with crypto in their accounts could potentially be entitled to some sort of grab bag, including some combination of crypto in their account, common shares of the reorganized Voyager, Voyager tokens, and so on the company’s lapsed loans to once-prominent crypto hedge fund Three Arrows Capital.

It’s unclear what the Voyager token would actually be worth or if any of it will eventually come together.

Three Arrows Capital is the third major crypto player to file for bankruptcy protection in a US federal court, in a trend that begs the question: will bankruptcy court ultimately be where, in some ways, a new precedent will be set in the crypto sector? of the regulation-by-ruling model?

Lawmakers on Capitol Hill are already trying to lay down more ground rules.

Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, DN.Y., are seeking clarity with a bill that would provide a comprehensive framework for regulating the crypto industry and split oversight among regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission.

What went wrong

Celsius’s overarching problem is that the nearly 20% APY it was offering customers wasn’t real.

In one lawsuit, Celsius is accused of running a Ponzi scheme where it paid early depositors with the money it received from new users.

Celsius also invested its funds in other platforms with similarly high returns to keep its business model alive.

A report by The Block revealed that Celsius had invested at least half a billion dollars in Anchor, the flagship lending platform of now-defunct USD-pegged stablecoin project terraUSD (UST). Anchor promised investors a 20% annualized percentage return on their UST holdings — a rate many analysts felt was unsustainable.

Celsius was one of several platforms to park their money at Anchor, which is a big part of why the cascade of major outages was so significant and rapid after the UST project imploded in May.

“They always need a return, so they move assets into risky instruments that are impossible to hedge,” said Nik Bhatia, founder of The Bitcoin Layer and associate professor of finance at the University of Southern California.

Bhatia attributes the $1.2 billion gap on its balance sheet to poor risk modeling and the fact that collateral was sold by institutional lenders.

“They probably lost customer deposits in UST,” Bhatia added. “When assets go down in price, that creates a ‘hole’. So liability remains bad risk models again.”

Celsius is not alone. Cracks keep forming in the credit corner of the crypto market. Castle Island Venture’s Carter says the net effect of all this is to destroy and withdraw loans, tighten underwriting standards and test solvency so everyone is draining liquidity from crypto lenders.

“The effect of this is that yields rise as credit tightens,” said Carter, noting that we’re already watching this.

Carter anticipates a general inflationary deleveraging in the US and elsewhere, which he believes only makes more of a case for stablecoins as relatively hard money and bitcoin as truly hard money.

“But the part of the industry that relies on issuance of frivolous tokens will be forced to change,” he said. “Therefore, I expect the outcome will be heterogeneous across the crypto space, depending on the sector.”

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