The Celsius Withdrawal Pause Rattles Crypto World
Crypto lending platform, Celsius, announced Monday that it had paused all "withdrawals, Swap, and transfers between accounts," blaming the move on "extreme market conditions."
Defining 'extreme market conditions' isn't difficult—there are multiple worthy candidates. These include the recent collapse of the TerraUSD stablecoin and a 40-year-high monthly inflation rate of 8.6% announced last Friday. The Celsius move triggered a slide across cryptocurrencies, with total crypto value dropping below $1 trillion for the first time since January 2021. Bitcoin, the largest token by market cap experienced a 14% tumble over the weekend to below $23,000.
A Crypto Bank
On its website, Celsius self-describes its mission as one of providing a "platform of curated services that have been abandoned by big banks—things like fair yield, zero fees, and lightning-quick transactions." In other words, crypto lender Celsius is a bank. Specifically, it is a decentralized or De-Fi bank.
Celsius lends and borrows crypto similar to what a traditional bank does with dollars, but without much of the infrastructure of a traditional financial institution. The platform offers very high returns on crypto deposits, up to 18.6% before the pause. This has led some critics to suggest Celsius and others like it don't have sufficient assets to back up deposits if there were a run by investors to withdraw funds.
The Pause Is a Big Deal
The pause in withdrawals, Swaps, and transfers—which was a reaction to volatility in the crypto space—has resulted in more volatility as the company's in-house Cel token dropped 70% within an hour of the announcement.5
Considering that the pause means that investors with money deposited with Celsius can't get their money out, the precipitous drop is not surprising, especially given the concerns critics have about Celsius's stability in the first place. According to Celsius, the company has 1.7 million investors with about $8 billion in deposits. No timetable for the end of the pause has yet been announced.
Crypto Lending Controversy
Crypto banks are growing in popularity—and controversy. Regulators and critics are concerned about investor protection and the risks associated with the lending of unregulated products like cryptocurrencies.
A lack of clear regulation puts Celsius and firms like it in a gray area, with some critics calling for assets to be subject to Securities and Exchange Commission (SEC) regulation as a way of protecting investors. Investors have rushed to deposit their money in crypto banks due to extremely high interest rates—as noted above, up to 18%, although 9% is more common according to reporting by the Washington Post.
The Bottom Line
The effective freezing of funds by crypto lender Celsius points to the larger problem of lack of regulation of these bank-like institutions. This is especially true during times of economic uncertainty that include high inflation, market instability, and a desire on the part of investors to get more "bang for their buck" when it comes to interest on savings.
While crypto lending platforms offer attractive rates, problems with platforms like Celsius demonstrate the need for more and better consumer protection in the area of cryptocurrency finance.