Celsius Network, a cryptocurrency lending platform with roughly 1.7 million customers and ties and offices in Israel, is in crisis after falling markets created liquidity problems, leading the platform to freeze all withdrawals and transfers between accounts this week.
The company said it was doing so in order to “honor, over time, withdrawal obligations.” Celsius, with more than $10 billion in assets, gave no indication in its announcement when it would allow users to access their funds.
Celsius, founded in 2017, employs over 100 people in Israel. It operates as a kind of crypto bank that allows clients to deposit cryptocurrency and borrow either cryptocurrency or US dollars. In exchange for customers’ deposits, the company pays out extremely generous yields, upwards of 19% on some accounts. Celsius takes those deposits and lends them out to generate a return.
Lending platforms such as Celsius have come under scrutiny recently because they offer yields that normal markets could not support, and critics have called them effectively Ponzi schemes.
In November the former CFO of Celsius Network, Yaron Shalem, was arrested along with nine others involved in the crypto business on suspicion of involvement in an alleged crypto scam that defrauded victims worldwide of huge sums of money. Celsius said following Shalem’s arrest that his alleged actions were unrelated to his period with the firm; it said he was suspended when Celsius learned that he was being investigated and was no longer employed by the company.
Celsius’s crisis is the latest high-profile collapse of a pillar of the cryptocurrency industry. These meltdowns have erased tens of billions of dollars of investors’ assets and spurred urgent calls to regulate the freewheeling industry.
On Wednesday CEO Alex Mashinsky made his first public comments on the meltdown, tweeting that his team was “working non-stop” to solve the firm’s problems. “This is a difficult moment; your patience and support mean the world to us,” he said.
@CelsiusNetwork team is working non-stop. We’re focused on your concerns and thankful 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.
— Alex Mashinsky (@Mashinsky) June 15, 2022
Francisco Orduna, 36, told the Associated Press he was referred to Celsius about a year ago and was attracted to the company’s promises of high yields on his crypto holdings.
“It was easy to overlook the risk because users got used to these weekly interest payouts from Celsius,” Orduna said. He pulled most of his money out of Celsius late last week but said he still had residual holdings trapped on the platform.
It is the second notable collapse in the cryptocurrency universe in less than two months. The stablecoin Terra imploded in early May, erasing tens of billions of dollars in a matter of hours. Stablecoins had been seen as relatively safe, because they’re supposed to be backed by hard assets, such as a currency or gold.
Just like Terra, Celsius had sold itself as a safe place for cryptocurrency holders to deposit their funds. Even while Celsius was failing, the company’s website advertised that users can “access your coins whenever, keep them safe forever.”
“There is a lot of work ahead as we consider various options, this process will take time, and there may be delays,” Celsius said in a statement.
The move surprised investors and depositors. In online chats, they questioned why their investments weren’t protected.
Orduna said he pulled his money out of Celsius partly because of the Terra implosion. There have been reports that Celsius had invested part of its users’ funds in Terra, and there were concerns that Celsius was taking too high of a risk with depositors’ funds.
“I started to worry whether the yield they were offering was truly sustainable,” he said.
It’s unclear whether Celsius depositors will get all their funds back. A cryptocurrency lender is not regulated like a bank, so there’s no deposit insurance and no legal framework for who gets their money back first, like in a bankruptcy. It’s possible that Celsius’s investors, which include Quebec’s pension fund and the prominent venture capital fund WestCap, may get their investment back before Celsius’s depositors will.
WestCap did not respond to a request for comment. The Pension Board of Canada also did not respond to a request for comment.
“This was yet another bank run. You’re not reinventing anything here. They were promoting their services as a better savings account but in the end, you’re just another unsecured lender,” said Cory Klippsten, CEO of Swan Bitcoin, who has been publicly skeptical of Celsius’s business model for years.
Terra, and its token Luna, offered similar yields on customer deposits. Those tokens collapsed after huge customer withdrawals forced Terra’s operators to liquidate all of the assets being used to support their currencies. The collapse of Terra has spurred calls for reform from the cryptocurrency industry, and calls for US Congressional regulation.