Celsius Network Freezes Withdrawals

Celsius Network Ltd. froze withdrawals, swaps, and transfers after weeks of skepticism over the sustainability of the DeFi lending platform’s outsized returns, causing a global cryptocurrency selloff.

Following the Celsius statement, cryptocurrency markets plunged, with Bitcoin plummeting as much as 14% to its lowest level since December 2020, and other major tokens such as Ethereum also falling sharply. According to data on CoinStats, Celsius’s CEL token was down roughly 50% to 15 cents as of June 13, 2022.

The crash is the latest setback for decentralized finance, DeFi, crypto’s alternative to traditional banking, providing users with greater flexibility and lower pricing and exposing them to greater risk.

Celsius homepage

Concerns about the sky-high yields backing products such as those offered by Celsius have intensified after the Terra ecosystem’s collapse in May and as tighter monetary policy worldwide restricts demand for riskier assets. The CEL token promises “actual financial rewards,” including as much as 30% extra returns weekly.

While the market was overwhelmed by the TerraUSD (UST) stablecoin’s collapse, one of the project’s key attractions for investors had been its promised interest rate,  set as high as 20% for UST deposits in the Terra blockchain-based lending venture Anchor. Celsius supported the project. Both are built on the promise of super-high returns to sustain demand, which depends on a steady flow of new entrants feeding the system or borrowing to pay the high rates.

Nexo, a London-based rival, stated on Twitter it was willing to buy Celsius’s remaining qualified assets, characterized as “primarily their collateralized loan portfolio.” Nexo later posted a letter of intent describing the offer. A Nexo spokesman confirmed the tweets.

Nexo also stated they had approached Celsius to offer assistance, but the offer was turned down. A spokesperson for the company claimed in an email they had a “good liquidity and equity position.” Celsius didn’t comment on Nexo’s remark.

In response to a tweet by Mike Dudas, co-founder of The Block, Celsius Chief Executive Officer Alex Mashinsky appeared to counter speculation about a withdrawal freeze, tweeting, “Mike do you even know one person who has difficulty withdrawing from Celsius?” in a day before announcing the halt.

Celsius announced the decision, saying, “We are taking this action now to put Celsius in a stronger position to pay its withdrawal commitments over time.” Users will continue to earn incentives during the interruption, according to the company.

The news came amid turbulence in crypto markets, with worse-than-expected US inflation data on Friday fueling predictions of faster interest rate increases, hitting riskier assets like digital currencies. Bitcoin has lost 48% of its value this year, while Ether has lost more than two-thirds of its value.

The Celsius news only added fuel to the fire, instilling uncertainty in the market, said Vijay Ayyar, vice president of corporate development and international cryptocurrency platform Luno. As the Fed decision week approaches, prices are under pressure, and there are questions about the protocol’s offering high-yield products.

According to CoinStats, tokens linked to lending and borrowing protocols underperformed on Monday (June 13, 2022), with their total value down 10% compared to a 6.4% loss in the broader crypto world. Celsius counterparts Aave, Maple, and Compound, fell 12%, 15%, and 13%, respectively.

According to Ethereum blockchain statistics, the largest single digital wallet holding CEL tokens belongs to Celsius, with over 184 million CEL tokens, or 26.6% of the entire quantity in circulation. Mashinsky stated in a weekend tweet that Celsius was not selling the token.

‘Grey Area’

Crypto lending solutions have been growing in popularity, with several firms launching offers the previous year. The increase has alarmed regulators, concerned about the challenges posed in safeguarding financial stability and the systemic risk posed by unregulated lending instruments. 

According to Matthew Nyman of CMS law firm, Celsius and other organizations that provide equivalent services operate in a regulatory “grey area.”

Last year, Celsius raised $750 million from investors, including Caisse de Dépôt et Placement du Québec, Canada’s second-largest pension fund. Celsius was valued at $3.25 billion at that time.

According to its website, Celsius had $11.8 billion in assets as of May 17, down more than half from October 2021, and had processed a total of $8.2 billion in loans.

In October 2021, Mashinsky, the Celsius CEO, was cited, stating Celsius had more than $25 billion in assets.

Latest Celsius Statement

Currently, the CEL token is the 153th largest cryptocurrency by market capitalization, currently trading at $0.55, up 13.67% in the last 24hrs.

Celsius CEO Alex Mashinsky broke his three-day silence on Thursday, saying that the company focused on its customers’ problems and was grateful to have heard from so many. “To see you come together is a clear sign our community is the strongest in the world. This is a difficult moment; your patience and support mean the world to us,” Mashinsky tweeted.

Mashinsky maintained an upbeat tone on social media, while Celsius began seeking financial advice from restructuring experts at the law firm Akin Gump Strauss Hauer & Feld LLP, according to the Wall Street Journal.

Final Words

The early May collapse of the TerraUSD stablecoin and its sister token Luna raised widespread concerns about the lucrative returns crypto lenders like Celsius, and decentralized-finance platforms had been promising investors. Before TerraUSD or UST failed, Anchor, a project tied to the Terra ecosystem, had been offering payouts of around 20%.

The collapse of Celsius’s token $CEL appears to be a realization of the UST/LUNA contagion risk into comparable financial tools, said Burak Tamac, a senior analyst at CryptoQuant specializing in regulatory and on-chain issues.

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