Another crisis is wracking the digital-asset sector a month after the collapse of Terra stablecoin sent the market tumbling, generating fresh trepidation among all cryptocurrencies. On Sunday, Celsius Network Ltd., one of the world’s largest lenders in cryptocurrency and a key player in decentralized finance, announced that it was halting withdrawals, swaps, and transfers.
The decision followed weeks of uncertainty regarding its ability to deliver on the unprecedented returns witnessed on certain of its products, including rates as high as 17%.
Celsius withdrawal freeze is crypto’s and latest crisis
The collapse is the most recent setback to the cryptocurrency market and DeFi ecosystem. While Celsius is a centralized platform that sets it apart from DeFi, its extensive involvement in the sector, including investment in Terra and various risky strategies intended to create large returns that it could then pass on to its customers- has increased concerns over its viability.
Towards the end of May, blockchain analytics firm Nansen fueled speculation that Celsius was partly to blame for the TerraUSD meltdown. After the failure of the $60 billion stablecoin venture Terra, crypto investors are concerned that Celsius’s possible demise might cause even more damage to a market already on uncertain ground following several crypto winters.
Investors are, just like Terra’s collapse, taking no chances. Ben Armstrong, a crypto YouTuber, has announced his intention to file a class-action lawsuit against the lending platform and its CEO. BitBoy is the second most subscribed crypto YouTube account. It has over 1.45 million subscribers and focuses on market news/trends content.
The company is experiencing severe liquidity issues owing to the cryptocurrency market downturn, with its shares falling by roughly 13 percent since the start of the year. On Monday, withdrawals were halted, and about $320 million in assets were moved to pay down debts and avoid liquidation on decentralized finance (DeFi) platforms like Aave.
According to news reports, Celsius has engaged restructuring attorneys from Akin Gump Strauss Hauer & Feld to look for potential solutions to its financial problems. However, Armstrong claims that companies hire these lawyers mainly to prepare them for bankruptcy.
In terms of recovering funds from Celsius, there appears to be a potential option for users with less than $25,000 worth of assets on the platform to receive their money soon. On Wednesday, Joshua Browder, founder of robot lawyer DoNotPay, posted a step-by-step procedure for getting money back:
The Celsius mess has taken the leadership position completely by surprise, and no timetable or strategy to fix it has been revealed. Many experts believe that spillover effects from the Celsius crisis will be limited to bitcoin.
What is next for the embattled network?
While it is uncertain whether Celsius is on the verge of bankruptcy, the firm offers “annual percentage yields” (similar to annual interest in traditional accounts) for crypto deposits in the neighborhood of 19%. It is not an FDIC-insured institution. This lack of registration could lead to customers becoming unsecured creditors. This could cause mass withdrawals and liquidity issues.
However, Celsius’s filing for bankruptcy would trigger the “automatic stay,” which would prevent creditors from pursuing collection efforts against the firm.
Meanwhile, rumors circulated about possible tension at Three Arrows Capital, a prominent hedge fund, following a vague tweet by its founder Zhu Su late on Tuesday, adding to market worries. According to media reports, Three Arrows announced it was in the process of figuring out how to repay lenders and other counterparties after top-tier lending firms in the market liquidated it.
We are in the process of communicating with relevant parties and fully committed to working this out
— Zhu Su(@zhusu) June 15, 2022
Three Arrows, a significant player and one of the most well-known hedge funds in the crypto world, is said to have about $10 billion in assets under management, according to Bloomberg, citing data from Nansen. According to a regulatory filing from December 2020, the company held more than 6 percent of the Grayscale Bitcoin Trust, the world’s largest bitcoin fund.
The skepticism has only added to the bitcoin squeeze, which is now trading near 70% below its all-time high in November. Some market participants are concerned about the contagious risks Celsius and Three Arrows Capital might pose to the cryptocurrency industry if they went bankrupt in a worst-case scenario.
The collapse of Terra and recent reports about Celsius and Three Arrows might harm the confidence of institutional investors in the cryptocurrency industry.
Blockchain-based cryptocurrency lending has been under regulatory scrutiny, with BlockFi agreeing to pay $100 million in penalties this year to settle accusations from the U.S. Securities and Exchange Commission and other authorities that it illegally provided a service that pays clients great interest rates to lend their digital tokens.
Users of the Celsius Network are coming to an unpleasant conclusion amid reports of bankruptcy. Users may never be able to retrieve their money if the crypto lender goes bankrupt. In bankruptcy proceedings, unsecured creditors frequently have to wait at the back of the line, implying that Celsius’ crypto funds could be used to pay off other creditors first.
Deposit insurance is available to retail bank customers in many countries. Customers at a U.S. bank, for example, are protected by the Federal Deposit Insurance Corporation (FDIC), a U.S. government agency. When a bank fails, the FDIC comes to the rescue of client funds up to $250,000 in value.
On the other hand, Celsius users don’t have this same protection; it’s made in all caps as part of the network’s terms of use. Without that protection, users may have considered it acceptable before Celsius halted withdrawals. Users may be reconsidering now that Celsius has instituted a freeze on withdrawals.
A financial institution that has issued cryptocurrency-denominated loans is on the verge of bankruptcy. However, its revival will come from the revitalization of the crypto market. Adam Levitin took to Twitter to offer investors an explanation of their risk.
