Customers fear Celsius insolvency as CEL token collapses

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Following rumors of insolvency over the weekend, Celsius announced Monday it has indefinitely paused withdrawals, swaps, and transfers between accounts due to “extreme market conditions.” Alex Mashinsky, the once-billionaire founder and ICO promoter of the CEL token, continues to evade pressing questions about the solvency of his business and the safety of his customers’ deposits.

CEL is down over 50% in the past 24 hours, from $0.41 to $0.19 at press time.

  • Celsius accepts crypto assets from customers and pays them ultra-high interest rates while they wait.
  • It uses its customers’ assets for a wide variety of crypto derivatives, lending, yield farming, arbitrage, and staking.
  • Celsius pays back customers some of the proceeds of these activities as interest and subsidizes customers if they choose to receive interest payments in the Celsius-issued CEL token.

Still advertising 18.6% APY amid fears of insolvency

Celsius is still advertising 18.6% yields — only slightly lower than Anchor’s promised 19.9% before it lost substantially all of its assets in Terra LUNA’s spectacular collapse.

During a bank run-type situation, cash is king. Many customers are scared — withdrawal requests accelerated this weekend ahead of a potential Celsius insolvency. Now that accounts are locked, customers have no choice but to hold onto their funds.

Insolvency is distinct from bankruptcy. It occurs when an entity cannot satisfy current cash demands or even when assets exceed liabilities. It’s unclear whether Celsius is experiencing cash flow insolvency or balance sheet insolvency.

As of press time, the price of CEL had declined more than 97% year-to-date. (Celsius still owns 26.6% of the supply.) Its founder is canceling media appearances.

Celsius’ customer support hotline urges traders to ‘HODL NOW.’ Not a typo, the firm says, while ironically forgetting to properly punctuate.

Read more: A complete timeline of Celsius’ relationship with Terra LUNA and Tether

Celsius recently invented ways to reduce the likelihood of a true bank run. Mashinsky slashed interest rates to reduce cash flow liabilities. He reduced the frequency of Celsius’ asset disclosures and introduced a new way to enforce delays on customer withdrawals, “HODL mode.” Of course, Celsius claimed at the time that this is a “safety” feature. Importantly, Celsius can forcibly impose HODL mode on customers’ assets without prior notice — now, Celsius has done just that to all accounts.

Other crypto lending firms are already swooping in to snatch up Celsius assets. Lead competitor Nexo expressed interest in buying parts of the company’s operations via a tweet on Monday — specifically Celsius’ collaterized loan portfolio. Nexo’s token is also down, about 26% in the past 24 hours ($1.02 then, $0.76 at press time).

Can staked Ethereum cause a Celsius insolvency?

Celsius is also a major stETH tokenholder and has hundreds of millions of dollars exposed to Ethereum 2 and its various liquidity pools, protocols, liquid staking services, and service providers. Once ETH is staked into Ethereum 2, it cannot be withdrawn until The Merge occurs several months from now.

The company does not disclose exactly how much exposure it has to Ethereum 2 and its largest liquid staking service provider, Lido, but analysts have various estimates north of $700 million.

Independent researchers unearth details of Celsius’ risky exposure to staked ETH (stETH).

Read more: Celsius lost $54 million Bitcoin by using MetaMask for customer funds

Protos published an in-depth explainer of Lido’s ostensibly Ethereum-pegged token, stETH. Subsequently, Lido’s stETH has depegged from ETH. At press time, stETH is trading at 0.94 per wETH. Analysts calculate that at 0.80 per ETH, stETH will be forced to liquidate $299 million in assets (Lido’s total ETH assets are just $7 billion.) Lower than that, prices risk a catastrophic cascade — and significant, possibly permanent impairment to Celsius’ assets.

When customers deposit assets into Celsius, they relinquish most of the rights that bank depositors would expect. Celsius does not insure deposits. There is no FDIC nor SIPC coverage. In the event of bankruptcy proceedings at Celsius, customers will be subordinated by other stakeholders and could be tied up in litigation or receivership for years.

Protos has published a timeline of Celsius’ relationship with Tether (USDT) and Terra LUNA’s failed stablecoin.

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