Interest rates at more than 18% for savers, but 0.1% for borrowers, that’s what Celsius Network offered before having to suspend all withdrawals on June 12 for lack of sufficient liquidity. Three weeks later, the funds, which reached $11.8 billion in mid-May, are still blocked. “I think Celsius will go bankrupt,” predicts Omid Malekan, a professor at Columbia University. “The essence of trust [des clients] flew”.
Founded in 2017, the Celsius lending platform wanted to act as “a bank” within the cryptocurrency ecosystem but according to documents revealed by the Wall Street Journal as of June 30, Celsius has $19 billion in assets, compared to $1 billion in stock. Consequently, Celsius has an asset-to-equity ratio of 19 to 1. For comparison, the average asset-to-equity ratio of North American banks is 9 to 1. According to the specialized media The BlockCelsius would seek to resist the advice of its lawyers to use Chapter 11 of the bankruptcy law.
Other names have since joined Celsius, from CoinFlex to Babel Finance, which had also dabbled in credit and had to freeze withdrawals, while Voyager Digital had to limit them. On these platforms, after depositing cryptocurrencies, a user can either receive interest or borrow digital currencies, with their deposit serving as collateral. “It’s a shame that we’ve come to this,” laments a user contacted via Reddit who claims to have left Celsius more than $350,000.
The sequence started with the sharp drop in cryptocurrencies, and bitcoin cut half its value in less than two months. This caused a chain reaction and forced borrowers to provide new financial guarantees or immediately repay the borrowed money. Some, such as the Singaporean investment company Three Arrows Capital, now in liquidation, were unable to cope and thus deprived the platforms of liquidity, which forced them to freeze the funds.
“The majority of these companies made loans without collateral or with insufficient collateral,” says Antoni Trenchev, co-founder of Nexo, another crypto platform which he says got away with a stricter lending policy and “prudent risk management”. No less than five American states have opened or extended investigations into Celsius. Some, including Alabama, had already ordered the platform to cease lending to customers domiciled in their state since last year.
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“A great need for regulation”
The fall of Celsius highlights the limits of an unsupervised universe. “There is a great need for regulation”, stresses Charles Jansen. “It is a point on which everyone agrees in the sector”.
In the absence of an ad hoc regulatory framework, it has so far been the American market policeman, the SEC, which has taken control of the matter, but from an essentially repressive angle. Several dozen bills have been tabled in the US Congress in recent months, but one of them in particular has the wind in its sails, because it is supported by members of both parties. The text has been well received by the cryptocurrency community, in particular because it proposes to treat cryptocurrencies as commodities, and not financial securities, as the SEC would like.
Conversely, some critics see it as too conciliatory a text. “He’s giving the crypto industry what it wants,” American University law professor Hilary Allen wrote on Twitter. He proposes in particular to entrust supervision to another regulator, the CFTC, “which has no mandate to protect investors and far fewer resources than the SEC”, insisted the academic.
The European Union took the lead on Thursday, reaching an agreement on cryptocurrency regulation, which will notably strengthen guarantees for investors and supervision. The Standard & Poor’s agency sees in recent events a window to position itself as a benchmark, as in the world of traditional finance. For Charles Jansen, “the general feeling is that if there had been a more reliable risk assessment, perhaps fewer people would have been affected.”
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