New York June 16 2022: Celsius Network amassed more than $20 billion in assets with a pitch that seemed to defy the basic physics of finance. Deposit crypto coins and earn interest rates as high as 18%, tens or hundreds of times the rates on traditional savings accounts. “When you look at what the banks pay, you say to yourself, ‘Somebody is lying. Either the bank is lying or Celsius is lying,’” co-founder Alex Mashinsky said in an interview last year.
More than a million people entrusted their savings to Celsius, according to the company. Even as skepticism mounted over whether its interest rates were sustainable, and customers started withdrawing hundreds of millions of dollars amid a deepening crypto rout, Mashinsky maintained that his company was safe. Then, on the night of June 12, Celsius announced it was halting withdrawals because of “extreme market conditions.” It was like a bank locking depositors out of its branches to preserve cash in the midst of a panic. “We are working with a singular focus: to protect and preserve assets to meet our obligations to customers,” Celsius said in a post on Medium.
Celsius’s apparent effort to ward off the digital equivalent of a bank run comes just a month after the $60 billion collapse of TerraUSD and Luna, two cryptocurrencies that were part of a complex system that lured investors with 20% interest rates. The back-to-back flops have spooked investors already anxious about the value of crypto assets. The price of Bitcoin fell to as low as $20,102 on June 15—its lowest since December 2020 and about 70% off its peak last year. Ether, the second-most-popular coin, has dropped 75% from its 2021 high, and many lesser-known cryptocurrencies and nonfungible tokens (NFTs) have suffered bigger declines. The total market value of all cryptocurrencies, which topped $3 trillion in November, fell below $1 trillion.
Crypto boosters are wondering where the bottom is, and just how systemically important Celsius and other projects may be to the digital asset market. “A run on Celsius could end up having a bigger impact on the market as a whole than the collapse of the Terra ecosystem—that hurt a lot, but was relatively isolated,” Noelle Acheson, head of market insights at Genesis Global Trading, tweeted on June 13. “This implosion could impact many ecosystems, as Celsius has a range of assets leveraged on several platforms.” Celsius didn’t respond to questions for this story.
The idea that investors can earn high returns without taking correspondingly high risks may sound foolish now. But Celsius and Terra were associated with what’s called decentralized finance, or DeFi—a constellation of companies, developers, and apps that are supposed to be building a new financial system around crypto and blockchain technology. While Celsius was organized like a traditional company, many DeFi projects are run by software protocols governed by users. Some claim near-magical abilities to pay big returns as a reward for allowing the platform to lend or temporarily use their tokens.
For more than a year, it seemed to be working. By November more than $100 billion was borrowed, lent, or deposited with DeFi protocols, according to DeFi Pulse. The activity powered the massive increases in the prices of all cryptocurrencies. “The financial revolution is DeFi and really just taking all the middlemen out of the financial ecosystem,” Cathie Wood, founder and chief executive officer of asset manager ARK Invest, said in March.
Celsius’s Mashinsky, 56, is an indefatigable pitchman. In speeches at conferences and weekly hourslong appearances on YouTube, he told his fans, whom he called Celsians, that Celsius was the way to financial freedom. Last year, in testimonials posted on Twitter as part of a contest, many said they’d trusted the company with their life savings. Celsius’s slogan was “Unbank Yourself,” and Mashinsky sold the company as a better alternative to traditional banks, which he argued were colluding to rip off savers. “We give the vast majority of the income to the community,” he said in an April podcast interview. “That is a new paradigm. It’s a new business model, never existed before. No one was crazy enough.”
Runs on traditional banks by depositors have been uncommon in the US since the creation of the Federal Deposit Insurance Corp. in 1933. But Celsius isn’t regulated as a bank, and its deposits aren’t covered by FDIC insurance. The lack of regulation also meant Celsius could invest customers’ funds as it saw fit, without restrictions, reserve requirements, or stress tests.
Mashinsky’s pitch focused on the high interest rates and was more vague about what Celsius was doing to earn the money to pay them. He said that the company lent money to hedge funds and other major entities in the crypto market, and that it sent users’ funds to DeFi protocols itself. In effect, Celsius was a more user-friendly gateway to the intimidatingly hard-to-understand DeFi world.
Last year, Celsius took advantage of its growth to raise $750 million from investors including Canadian pension fund Caisse de Dépôt et Placement du Québec. The valuation of the funding round, about $3 billion, made Mashinsky a billionaire on paper. He told Cointelegraph at the time that he expected the value to double or triple this year, to as much as $10.5 billion.
Skeptics had started raising questions online about Celsius’s investments. One influential anonymous poster, who went by “Dirty Bubble Media,” used publicly available data from the blockchain to illustrate examples of where exactly Celsius was investing. His account gained 14,000 followers on Twitter and inspired others to start questioning Celsius, too. In an interview, he says his real name is C.J. Block and he’s a 30-year-old recent medical school graduate who started the project in his spare time. “What surprised me was how much risk they were taking on,” he says.
