Lending Platform Celsius Freezes Withdrawals, Swaps, and Transfers – Results in Widespread FUD

Digital asset lending platforms have thrived over the past few years.  Seemingly overnight, the likes of Celsius, BlockFi, Nexo, Ledn, and more popped up and began offering interest bearing accounts with uncommonly high rates.  Unfortunately, the past few months have not been kind to this crop of companies, with regulators circling and market conditions becoming increasingly hostile.

Celsius is the most recent example of this, as the lending giant has just announced that it is “…pausing all withdrawals, Swap, and transfers between accounts” for its clients – resulting in a widespread resurgence of FUD across the market.

The Halt

Celsius is a wildly popular centralized lending platform which has lured in scores of clients through its insane interest rates, and promise of security.  While Celsius has done its best to put investors at ease, promising that it will do everything it can to bring operations back to normal, the decision to pause platform activity has resulted in widespread effects across the digital asset market.  Here are a few details on the situation.

Why Is Celsius Doing this?

Citing “extreme market conditions”, Celsius indicates that it made the decision to halt withdrawals as it adhered to its “risk management framework”.  The purpose of this framework is to allow for the company to “…stabilize liquidity and operations while we take steps to preserve and protect assets”.

What is Celsius Doing About It?

Freezing platform activity may give Celsius a bit of breathing room so that it can concentrate on finding a solution for the issue at hand, but it doesn’t do anything to directly remedy it.  With that in mind, it is believed Celsius has un-staked wBTC worth nearly $250M, and sent both it and nearly $75M worth of Ether to FTX, in a suspected attempt to re-establish adequate levels of liquidity within its platform.  How it plans on achieving that is still unknown – will Celsius sell these holdings, and put further strain on the market? or will it simply stake the assets in an attempt to earn enough for its purposes?

Celsius itself has not shared any further details on its game-plan, aside from stating, “There is a lot of work ahead as we consider various options, this process will take time, and there may be delays.”

What Led to this Situation?

So how does a company with a purported 1.7 million clients find itself in this situation?  It is easy to pay the bills and stay afloat in a bull market where no-one can do wrong.  Unfortunately, these times are fleeting, giving way to the turbulent bear market that is currently consuming digital assets.  While the reasons are many for why Celsius is where it is, the following are a few examples of why – not all of which are in the control of the company.

TerraForm Labs (LUNA / UST)

The market is still feeling the effects of this debacle last month.  Not only was Celsius heavily invested in Terra’s Anchor protocol, it is believed that trading activity which took place on its platform is responsible for kick-starting the inevitable death-spiral that led to the collapse of LUNA and UST.

Macroeconomics

Most of the worlds economies are struggling right now.  Inflation is running rampant, interest rates are rising,  stock markets are down, and volatility within digital assets as returned with a vengeance.  As investors continue turning to risk-off assets, and the appeal of CeFi wanes, companies are sometimes forced to turn to obscure ways of propping themselves up – taking unnecessary risks along the way and paying for them.  Currently there are two major events responsible for these issues – multiple years of economic stimulation due to COVID, followed by the Russian invasion of Ukraine.

Market Cycle

Turbulence being experienced may also be a product simply of the market cycle.  The market as a whole follows Bitcoin, with the top digital asset typically finding itself in a lull within the latter half of each halving cycle.  Based on crypto-winter, which made its presence felt throughout 2018, it was only in the months leading up to the 2020 halving that favourable market conditions returned.

No Stranger to Controversy

Aside from the problem at hand, Celsius is no stranger to controversy.  As previously indicated, regulators have long had their eyes on such platforms, resulting in various being forced to restrict services within certain demographics.  Celsius in particular was ordered by New York Attorney General, Letitia James, to cease operations within the State of New York in late 2021.

While being removed from New York may have been out of Celsius’ control, its investment and hiring decisions were not.  These decisions included not only significant exposure to the recent collapse of LUNA & UST, but employing a CFO who was arrested in 2021 due to ties with a shady venture capital firm.

Commentary

With markets currently shook, industry experts such as ARK36 Executive Director, Mikkel Morch, have taken the time to share their perspective on what is happening.  He states, “The global economic environment is becoming extremely tough to navigate for investors involved in all kinds of markets, so it is no surprise that Bitcoin is also facing increased downward pressure. Over the past couple of years, cryptocurrencies have become a global macro asset and so it is to be expected that they will react negatively now when investors realise that central banks haven’t reacted nearly as aggressively as they will need to in order to get inflation under control.

While we may eventually see some short-term relief, in the medium term, everyone is really bracing for more downside. Crypto investors should be especially nimble and watch developments within the space as closely as in the broader macro-environment. Bear markets have a way of exposing previously hidden weaknesses and overleveraged projects so it is possible that we see events like last month’s unwinding of the Terra ecosystem repeat. For example, Celsius and Tron are two projects that seem particularly risky at the moment.

For those looking for a silver lining, however, it is good to remember that although bear markets bring a lot of pain to the investors in the short term, they are a very effective filter which helps the crypto space grow in the long term. Now is the time to focus on finding and supporting projects with strong use-cases and true utility that will inevitably fare well during the next bull market.”

Market Reaction

Looking beyond Celsius, how has this event affected its peers within the sector?  In an effort to minimize FUD, various companies have already reached out through social media – with examples coming from both Ledn, and BlockFi

Source: @hodlwithLedn

Source: Twitter @BlockFi

The worlds most popular stablecoin, Tether, has also issued a statement on the situation. “While Tether’s investment portfolio does include an investment in the company, representing a minimal part of our shareholders equity, there is no correlation between this investment and our own reserves or stability. Also Tether lending activity with Celsius (as with any other borrower) has always been overcollateralized and has no impact on our reserves. “

Although each of the examples of above don’t help clients of Celsius, they do highlight which companies approach towards risk management are more effective during tough times – and while the aforementioned companies have provided assurances, there is another that appears set on taking a more active approach to the situation. Lending platform rival, Nexo, has issued a ‘Letter of Intent’ to Celsius that would see it purchase “…certain remaining qualifying assets, mainly collateralized loan receivables secured by corresponding collateral assets, abrand assets and customer database of the business.”  This offer has the potential to benefit three groups – Nexo will gain Celsius’ client pool information, Celsius offloads its troublesome assets to a more stable platform, and customers can rest assured that their funds will remain safe.

‘Not your keys…’ – An Overlooked Risk

Regardless of why Celsius is currently experiencing these troubles, the event has highlighted an often overlooked risk by investors – using CeFi means giving up true control/ownership of your assets.  There is a reason the phrase “not your keys, not your coin” has been repeated for years.  By forfeiting access to the private key associated with your holdings, you are putting all of your faith in a third party and hoping that it will act as a fiduciary on your behalf.  Unfortunately, if this fails to be the case, your holdings are now at the whims of another which will most likely choose to service its large scale investors in time of strife over its retail supporters.

So what is the answer?  Don’t succumb to enticing over-the-top interest rates, and store your assets on a privately controlled wallet – not in the care of another.

Two of the best options for this are Exodus (for those needing a software hot-wallet), and KeepKey (for those needing a hardware cold-wallet).  While there are many trustworthy options out there, these two each boast flexibility in services, a slick interface, and most importantly – a strong track record built over time.

On the surface, many companies may look normal and only be days away form a terrible event.  Although most companies are able to avoid such an occurrence, every once in a while a company like Celsius will falter.  If they do, just hope that your funds are safe.

Looking Forward

Despite the negative effect this most recent event is having on digital assets, the market has been here before during past cycles.  Unlike the crypto-winter of 2018, some solace can be taken in the massive amount of talent and money that have entered the sector in the time since.  The future is more secure now than it was then.  With companies and governments increasingly committed to digital assets, the market will live to see another day – and another bull market.

It is important to remember that the difficult market conditions that continue to vex Celsius are not unique to the digital asset sector.  Traditional markets too are in a state of decline and uncertainty not seen in years (i.e. At time of writing Boeing is down 8%, GM is down 6.7%, Alibaba is down 9.8%, etc.)  Just today, the Dow Jones Industrial Average was hit with a 600 point decline on opening – a move that has now signaled a bear market within the United States.