Starting with the lofty goal of competing with traditional banks, the crypto lending giant and its clients are now facing financial distress due to their appetite for risk and a lack of regulatory guardrails.
Celsius Network, which suspended withdrawals in mid-June, advertised a seemingly intractable combination of interest rates, charging just 0.1% on loans but paying more than 18% on deposits.
A few weeks later, savings accounts that reached $11.8 billion (approximately 933 billion rupees) in mid-May are still frozen.
“Celsius will go bankrupt somehow,” said Columbia University professor Omid Malekan. “Even if they get 98 cents back for savers, nobody wants to use it.”
Since then, other operators have faced a similar fate, from CoinFlex to Babel Finance, which have also tried lending and had to freeze withdrawals, while Voyager Digital has had to limit them.
These platforms allow customers to deposit cryptocurrency and earn interest or borrow digital currency by using their savings as collateral.
“It’s a shame that things have come this far,” said one Celsius user contacted on the Reddit platform, who claimed to have tied up more than $350,000 (about Rs 270 crore) to the lender.
“Obviously, Celsius should plan for this situation,” the user added, speaking on condition of anonymity.
The devastating sequence began with a sharp fall in cryptocurrencies, including Bitcoin losing nearly 60% of its value over the past six months.
The slump in value — which fell as global inflation accelerated and the impact of Russia’s invasion of Ukraine on the world economy — led to a chain reaction that forced borrowers to provide new financial guarantees or repay loans immediately.
Some borrowers, such as Singapore-based investment firm Three Arrows Capital, which is in liquidation, were unable to provide creditors with enough cash to cover withdrawals and freeze client accounts.
“Most of these companies are offering unsecured or under-collateralized loans,” said Antoni Trenchev, co-founder of another crypto platform Nexo, who said that by following stricter lending policies and “prudent risk management” trouble.
Unlike banks, these lenders are not required to hold cash as a reserve for bad loans.
‘Very need for regulation’
A handful of U.S. states have begun or expanded investigations into Celsius, and some, including Alabama, last year ordered the platform to stop lending to its residents.
“I do expect a very strong general crackdown,” Malekan said. “There’s a lot of material out there for the government to pursue.”
Despite the turmoil, most observers expect cryptocurrencies to recover from the current lending problems and don’t think this will mean an end to lending in the industry.
Charles Jensen of S&P Global Ratings said: “This is not the worst crisis that cryptocurrencies have ever experienced.”
The situation presents an opportunity to weed out weaker companies, Malekan said.
“During a bear market, you learn which projects have a core value proposition and solve real problems, and which are just pipe dreams.”
Some, like Trenchev, expect major consolidation in the industry, with healthy operators gobbling up troubled ones.
The incident also raised awareness of the risks of a lack of government oversight.
“There is a huge need for regulation, and it’s something everyone in the space agrees on,” said Jensen, whose firm is vying to be recognized as a risk assessor in the crypto world.
In the absence of market regulators with a specific regulatory framework, the SEC has been in the lead, but mostly with punitive measures.
Several bills aimed at addressing closer oversight have been introduced in Congress in recent months, but a bipartisan Senate proposal by Republican Cynthia Lummis and Democrat Kirsten Gillibrand has been gaining momentum.
The bill has been well-received by the crypto community, particularly as it gives the industry’s preferred regulator, the Commodity Futures Trading Commission, powers over the SEC.
Some critics say the proposal is too inclusive.
“It’s bipartisan in the sense that senators from different parties are giving the crypto industry pretty much what it wants,” said Hillary Allen, a professor at American University’s Washington School of Law on Twitter. ”
She added: “It gives most of its jurisdiction over crypto assets to the CFTC, which has no investor protection mandate and far fewer resources than the SEC.”