This Sunday, crypto financial services giant Celsius (CRYPTO: CEL) saw its dedicated token flash crash after market pressure forced the company to suspend withdrawals from its platform.
What Happened: Celsius — a service allowing its users to earn interest on crypto deposits or loan out funds against a crypto collateral — paused all withdrawals, swaps and transfers between the platform's accounts, as Benzinga reported on Sunday. The company explained in a dedicated announcement that it took the measure "due to extreme market conditions" after the crypto market reported a sudden and major downturn.
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Celsius wrote in a Monday announcement that the activity halt is meant to put the company "in a better position to honor, over time, its withdrawal obligations," presumably suggesting that the company would currently be unable to fulfill all withdrawals. The company explained that it was able to take such measures by activating a clause in its terms of use, but promised that users will be still earning interest on their assets while those measures are in place. The announcement reads:
"Our ultimate objective is stabilizing liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible. There is a lot of work ahead as we consider various options, this process will take time, and there may be delays."
Why Were The Withdrawals Paused?
While Celsius promises on its website that it will allow its users to access their assets "whenever" and "keep them safe forever," the company is not known for managing the assets of its users in the most risk-averse way. In fact, investor Mike Alfred wrote in a May 14 tweet that "Celsius may be the most irresponsible company in crypto." He also forecasted that "the next Terra Luna blow-up is almost certainly Celsius."
Alfred highlighted that Celsius showed its irresponsible conduct with how much it lost through its involvement in Luna — with The Block Crypto reporting that the company had at least 261,000 Ethereum (CRYPTO: ETH) (worth $535 million at the time) in Luna's Anchor Protocol decentralized finance (DeFi) service. This is famously the same protocol that used to advertise a 20% APY on the now-defunct stablecoin TerraUSD (CRYPTO: UST).
Fortunately, Celsius was able to withdraw 225,000 ETH (or $463 million at the time) on May 11, not long before the stablecoin collapsed and Terra followed suit. That day, the company's official Twitter Inc. (NYSE: TWTR) profile wrote that it "implemented and abides by robust risk management frameworks" and "all user funds are safe" and the service stays "open for business as usual."
The Block's research showed that Celsius "used Bonded ETH (CRYPTO: BETH) as collateral to borrow UST, which was then lent to Anchor for yield" rather than holding UST directly. This strategy allowed the company to skirt most of the losses that were perceived by the rest of the market involved in UST-based interest-earning activities.
Those funds were not taken away for safekeeping, as the Ethereum withdrawn from Anchor protocol was redirected to Aave (CRYPTO: AAVE), a DeFi lending protocol. Alfred asked his followers, "given how much money they lost in Luna, where else do you think they're hemorrhaging your capital? Mining? Do you really think they have all the Bitcoin they claim?"
Celsius's bETH (CRYPTO: BETH) tokens are based on Lido Staked Ethereum (CRYPTO: stETH) tokens, which are meant to enable liquidity while receiving Ethereum staking rewards. Tokenized Staked Ethereum will supposedly be redeemable for Ethereum in a one-to-one fashion when the transition to proof-of-stake is complete, but in the meanwhile the two trade as if they were two separate assets.
This peg between stETH and Ethereum broke last week as the value of stETH began to plunge dramatically when compared to ETH. Dune Analytics data shows that on Monday morning, stETH was trading just 93% of ETH's value, after trading at 95% on Friday and having begun trading at 97% in May.
A former analyst at crypto data firm Messari suggested that "Celsius is a HUGE holder of stETH" and iseven "the largest holder of interest-bearing stETH" deposited on AAVE. He pointed out that "a number of institutions and normal participants have exposure to stETH at the incorrect risk level given it’s close-ended liquidity structure."
According to data shared by the analyst, the Staked Ethereum to Ethereum liquidity pool only has 250,000 ETH for 642,000 stETH, meaning that if Celsius wanted to sell all of its stETH it could only receive 250,000 ETH despite holding $702 million worth of it — 457,579 stETH on Aave only.
Celsius also reportedly holds debt in stablecoins versus Ethereum, Bitcoin (CRYPTO: BTC) and Chainlink (CRYPTO: LINK) which exposes it to the crypto market's volatility — a crash would decrease the loan-to-value ratio.
Also, Celsius has locked most of its Ethereum in non-liquid forms such as stETH or beacon chain ETH (which cannot be moved onto the old chain): only 29% of its holdings is liquid Ethereum.
Even that held Ethereum is tied to DeFi protocols as collateral for loans and can be redeemed only after repaying the loans. On top of that, there have been multiple reports of Celsius losing user funds, for instance 38,000 ETH was lost when Stakehound misplaced its private key in June 2021, and $120 million was lost in the BadgerDAO hack at the end of last year.
While he did not explicitly suggest that the company may have been lying about its solvency, the analyst pointed out that Celsius has released audit reports for the years 2019 and 2020 but then stopped — ever since then the firm's claimed assets under management have not been verified.
