From $25 Billion to $167 Million: How a Major Cryptocurrency Lender Collapsed, Dragging Many Investors With It #billion #million #major #crypto #lender #collapsed #dragged #investors Welcome to OLASMEDIA TV NEWSThis is what we have for you today:
Celsius filing for bankruptcy this week hardly surprised anyone. Once a platform freezes client assets, it’s usually over. But just because the fall of this embattled cryptocurrency lender didn’t come as a shock doesn’t mean it wasn’t much of a problem for the industry.
In October 2021, CEO Alex Mashinsky said: cryptocurrency lender had $25 billion in assets under management. Even in May, despite crashing cryptocurrency prices, the lender managed about $11.8 billion in assets, according to its website. The company had another $8 billion in customer loans, making it one of the world’s biggest names in crypto lending.
Now Celsius has dropped to $167 million “cash on hand”, which it says will provide “sufficient liquidity” to support operations during the restructuring process.
Meanwhile, Celsius owes its users about $4.7 billion, according to his bankruptcy filing – and there’s a gap of about $1.2 billion in the balance sheet.
It goes to show that leverage is great medicine, but the minute you get all that liquidity out of it, it’s a lot harder to keep the party going.
The fall of Celsius marks the third major bankruptcy in the crypto ecosystem in two weeks, and it is being billed as crypto’s Lehman Brothers moment – comparing the contagion effect of a failed cryptocurrency lender to the fall of a major Wall Street bank that eventually the 2008 mortgage debt and financial crisis.
Whether or not the Celsius implosion portends a greater collapse of the larger crypto ecosystem, the days of customers accumulating double-digit annual returns are over. For Celsius, promising those big returns as a means of onboarding new users is a big part of what led to its eventual demise.
“They subsidized it and took losses to get customers in,” said Castle Island Venture’s Nic Carter. “The revenues, on the other hand, were fake and subsidized. In short, they brought in the returns from [Ponzi schemes].”
Who gets their money back?
Three weeks after Celsius halted all withdrawals due to “extreme market conditions” — and a few days before the cryptocurrency lender finally filed for bankruptcy protection — the platform was still advertising in bold text on its website annual returns of nearly 19%, which paid out weekly.
“Switch 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 to quickly attract new users. Celsius said it had 1.7 million customers in June.
The company’s bankruptcy filing reveals that Celsius also has more than 100,000 creditors, some of whom have lent the platform cash without any collateral to back the settlement. The list of the top 50 unsecured creditors includes Sam Bankman-Fried’s trading firm Alameda Research, as well as an investment company based in the Cayman Islands.
Those creditors will probably be first in line to get their money back, should anything be up for grabs — with mom and pop investors holding the bag.
After filing the bankruptcy petition, Celsius clarifies that “most account activity will be paused until further notice” and that it “has not requested any authority to allow withdrawals from customers at this time.”
The FAQ goes on to say that rewards building will also be halted by the Chapter 11 bankruptcy process and customers will not receive rewards payments at this time.
That means customers trying to access their cryptocurrency are out of luck for now. It is also unclear whether bankruptcy proceedings will ultimately allow customers to recoup their losses. If there is some sort of payout at the end of what could be a multi-year process, it’s also questionable who would be first in line to get it.
Unlike the traditional banking system, which typically insures customer deposits, there are no formal consumer protections to safeguard user funds when something goes wrong.
Celsius describes in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. Since Celsius had not provided any collateral, client funds were essentially just unsecured loans to the platform.
Also in the fine print of Celsius’s terms and conditions is a warning that in the event of bankruptcy, “all eligible digital assets used in the earning service or as collateral under the lending service may not be recoverable” and that customers ” may not have any remedies or rights in connection with Celsius’s obligations.” The disclosure reads like an attempt at general immunity from legal misconduct, should things ever go wrong.
Another popular lending platform for retail investors with high yield offerings is: Voyager Digitalwhich has 3.5 million customers and also recently filed for bankruptcy.
To reassure their millions of users, Voyager CEO Stephen Ehrlich . said tweeted that after the company goes through bankruptcy proceedings, users with crypto in their account may qualify for some sort of grab bag of stuff, including a combination of the crypto in their account, common stock in the reorganized Voyager, Voyager tokens, and then whatever proceeds they can get from the company’s now-defunct loan to the once prominent crypto hedge fund Three Arrows Capital.
It’s unclear what the Voyager token would actually be worth, or whether this will all come together eventually.
Three Arrows Capital is the third major crypto player to seek bankruptcy protection in a US federal courtroom, in a trend that cannot help the question: will the bankruptcy court eventually be the place to set a new precedent in the crypto sector, in a sort of rule -by-ruling model?
Lawmakers on Capitol Hill are already looking for more ground rules.
Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, DN.Y., aim to bring clarity with a bill that provides a comprehensive framework for regulating the crypto industry and dividing oversight among regulators such as 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 offered to customers was not real.
Celsius also invested its money in other platforms that offer similar sky-high returns to prop up its business model.
A report from The Block discovered that Celsius had invested at least half a billion dollars in Anchor, the flagship lending platform of the now-failed US dollar-pegged stablecoin project terraUSD (UST). Anchor promised investors a 20% annual return on their UST holdings — a rate many analysts believed was unsustainable.
Celsius was one of several platforms to park its money at Anchor, which is a big part of why the cascade of major failures was so vast and rapid after the UST project imploded in May.
“They always have to make returns, so they move the assets into risky instruments that are impossible to hedge,” said Nik Bhatia, founder of The Bitcoin Layer and adjunct professor of finance at the University of Southern California.
As for the $1.2 billion hole in its balance sheet, Bhatia attributes this to poor risk modeling and collateral being sold from the bottom up by institutional lenders.
“They have probably lost customer deposits in UST,” Bhatia added. “If the assets fall in price, you get a ‘gap’. Liability remains, so again, poor risk models.”
Celsius is not alone. Cracks continue to form in the lending corner of the crypto market. Carter of Castle Island Venture says the net effect of all of this is to destroy and withdraw credit, tighten underwriting standards and test solvency so that everyone is draining liquidity from cryptocurrency lenders.
“As a result, revenues are increasing as credit becomes scarcer,” said Carter, noting that we’re already seeing this happening.
Carter expects a general inflation slowdown in the US and elsewhere, which he says only advocates stablecoins, as relatively hard money, and bitcoin, as real hard money.
“But the part of the industry that relies on the issuance of frivolous tokens will be forced to change,” he said. “So I expect the result will be heterogeneous in the crypto space depending on the specific sector.”