Crypto Lender Celsius Is Risking Insolvency After Freezing All Account Withdrawals

On Sunday, crypto lending giant Celsius Network said it would pause all customer withdrawals and transfers as crypto assets plummet.

Bishal Kumar Chanda4 min read
Crypto Lender Celsius Is Risking Insolvency After Freezing All Account Withdrawals

On Sunday, crypto lending giant Celsius Network said it would pause all customer withdrawals and transfers as crypto assets plummet.

"Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swap, and transfers between accounts," Celsius Network said in their statement. "We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations."

Celsius's move is the latest sign of financial market turbulence causing distress in the crypto space. The move has triggered a slide across cryptocurrencies, with their value dropping below $1 trillion on Monday. In fact, it's the first time since January 2021, accompanied by an 11% fall in the largest token, Bitcoin.

According to Coinmarketcap, Celsius Network's CEL token has plummeted around 50% in the last 24 hours.

This weekend's crypto downturn follows May's latest inflation reading released Friday. It depicted that the consumer price growth accelerated during the month, matching the 40-year high increase of March. Thus, it revived fears that the Federal Reserve needs to hike the short-term rates faster than expected, risking a recession.

Celsius' Future Remains Unclear

After raising a Series B funding in November last year, Celsius Network had a $3.5 billion pre-money valuation. Celsius CEO Alex Mashinsky claimed that the crypto lending platform held $28.6 billion in assets under management.

However, last month The Logic reported that Celsius' depositor holdings had dropped to $12 billion between its Series B funding and May end. In addition, blockchain analytics firm Nansen showed that Celsius Network sold its Terra stablecoin holdings, UST, early into its collapse.

Celsius CEO before the collapse.

Moreover, the report states that Celsius moved $225.9 million from the Anchor Protocol between May 7 and May 10. Also, the blockchain analytics firm has indicated Celsius has "significant ETH liabilities."

According to Celsius' terms of use, the customer funds deposited in Celsius' Earn and Borrow services are not recoverable. It holds in the event of bankruptcy or if the company cannot repay its obligations.

The terms state, "You may not have a right to 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."

Nexo Offers To Buy Out Celsius' Loans

Following the reports of Celsius' insolvency, Nexo has submitted a formal letter to acquire Celsius' assets. The letter reads, "Nexo, its partners, and affiliates could readily acquire from Celsius part or all qualifying, outstanding collateralized loan receivables secured by their corresponding pledged cryptocurrency collateral, subject to Nexo's risk management and collateral requirements."

Nexo extends offer to buy Celsius' outstanding loans.

In brief, Nexo will absorb all Celsius' loans and gain its customer database. Meanwhile, Nexo has given the Celsius team seven days to respond as the proposal terminates on June 20. Moreover, Nexo has separately reassured investors that their funds are safe.

Furthermore, Nexo is not the only firm to come to Celsius' aid. Bitcoin-only exchange Swan Bitcoin founder Cory Klippsten has also offered a "life raft" to Celsius investors. Klippsten has provided "free membership in Swan Private ($3000 value) for the first 1000 Celsius members" to dm him.

The Crypto Lending Business

Over the past year, the high-yield rates offered by Celsius and other crypto lenders have significantly dropped. However, the returns remain much higher than traditional savings accounts. According to crypto lenders, they can offer such yields by lending customer funds at a higher interest to institutional investors.

As these services are marketed as alternative savings accounts, U.S. federal and state regulators argue that the high-yield savings accounts are unregistered securities. Therefore, warranting more investor disclosure and oversight since last year. In fact, BlockFi agreed to pay $100 million to the SEC and other state regulators for offering unregistered securities.

While the current scenario is still developing, by halting withdrawals, Celsius can still try to trade out of it. However, that could risk steeper losses and the ire of regulators. As of late January, Celsius is already under the SEC's radar.

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