Celsius crypto bank freezes withdrawals;  bitcoin, etherium drop

Celsius crypto bank freezes withdrawals; bitcoin, etherium drop

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The decision by embattled cryptocurrency bank Celsius to halt withdrawals by its nearly 2 million users shook crypto markets Monday, underscoring fears that some of the industry’s biggest companies are on weak financial footing.

“Due to extreme market conditions, we are announcing today that Celsius is suspending all withdrawals, Swaps and cross-account transfers,” the company, officially called Celsius Network, said late Sunday. “We’re taking this action today to put Celsius in a better position to meet its withdrawal obligations over time.”

In layman terms, this means that people who have invested in Celsius to get their famously high returns can’t pull it off for now. The company says it has 1.7 million users and is believed to hold about $8 billion in deposits currently frozen.

No timeline was offered for when withdrawals will be restored.

The news caused the biggest cryptocurrencies to drop – bitcoin fell 12 percent Monday afternoon and ethereum fell 13 percent. There is a kind of feedback loop here; What likely contributed to Celsius’s liquidity problems in the first place was a drop of more than 10 percent for each currency in the days prior to the announcement.

Overall, bitcoin has dropped 23 percent in the last five days, while ethereum has dropped 30 percent over that time; both are now sitting at their lowest prices in about 18 months. Celsius’s own coin, meanwhile, fell to 21 cents from $7 last year.

Crypto skeptics are getting louder

Also Monday, Binance, one of the world’s largest crypto exchanges, briefly suspended trading. It wasn’t clear whether liquidity was a factor — the company blamed a “stuck transaction” and said it was largely resolved Monday afternoon.

Celsius is a “decentralized” or “DeFI” bank that borrows cryptocurrencies for dollars, just like a financial institution does, but lacks most of the usual banking infrastructure.

Celsius offers extremely high returns to crypto depositors. Before it stopped, that rate was 18.6 percent, many times that of traditional banks, and has climbed as high as 30 percent in the past. This has led critics to say that they do not have the assets to back up the deposits if enough investors demand their money back.

Last year, state governments asked many of the same questions. Last September, the New Jersey Bureau of Securities sent the firm a cease and desist letter, while Alabama and Texas also asked it to answer questions about its liquidity. (The firm has offices in New Jersey, as well as Europe and the Middle East.) The New York attorney general also requested more information about Celsius’s business.

The New Jersey letter noted that Celsius “did not disclose the amount of money allocated to each of the investors.” [its] investment activities” or “the nature and creditworthiness of borrowers”. He said his goal was to “stop the offering and sale of these unregistered securities”.

Unlike traditional banks, crypto lenders have no regulatory obligation to maintain sufficient assets; Investors have no protection from the Federal Deposit Insurance Corporation, which insures deposits in banks in case of a lack of funds during a run at a crypto bank.

There is a high level of interconnectedness in crypto, with many companies borrowing from or investing in each other. This potentially increases the difficulties.

Celsius has in the past borrowed as much as $1 billion in dollar-pegged “stable money” Tether to maintain its liquidity. Tether has generated questions about whether it has adequate asset support.

And what some experts believe caused Terra’s stablecoin to crash last month were transactions by Celsius, which fueled a larger crypto crash that shook most of the market, including Celsius.

Crypto’s decline tests the resilience of a hype-driven industry

Stephen Diehl, a London-based software engineer who is leading a technologist campaign against crypto in Washington, has put any potential Celsius resolution bug at the government’s doorstep.

“Unfortunately, this is a regulatory failure on the part of the SEC,” he wrote in a message to the Washington Post. “There have been red flags at this company for years and they have done nothing. These protocols, which promise returns of more than 20% from any economic activity, are basically just a new form of Ponzi scheme. It’s a shame many retail investors will lose everything when this is so avoidable.”

Other crypto skeptics warn of a potentially greater reckoning – perhaps on par with the “crypto winter” of 2018, when Bitcoin lost two-thirds of its value as investors fled. This event wiped out a lot of paper wealth for crypto players before new money flowed back in 2021 and sent many currencies to all-time highs.

The chances of the Celsius action infecting its larger economy appear limited, but there could be potential downside effects on Canadian pension holders. CDPQ, one of that country’s largest pension funds, is an investor in the lending platform.

Celsius tried to reassure investors in its statement while making several commitments.

“We have a lot of work ahead of us as we consider various options,” he said. “There may be delays,” he added, but “Celsius has valuable assets and we work diligently to meet our obligations.”

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