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Crypto Debacle at Celsius Rattles Market Already Shaken by Terra

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·4 min read
Crypto Debacle at Celsius Rattles Market Already Shaken by Terra
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(Bloomberg) -- A month after the implosion of the Terra stablecoin sent the crypto market reeling, another crisis is causing fresh angst across the entire digital-asset universe.

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Celsius Network Ltd., one of the biggest lenders in crypto and a key player in the world of decentralized finance, said late Sunday that it was pausing withdrawals, swaps and transfers following weeks of speculation over its ability to make good on the outsize returns it offered on certain of its products, including yields as high as 17%. The move effectively halted a platform with registered entities across the globe and billions of dollars worth of digital coins under management, accelerating a selloff in the broader market that was already in progress on concern over prospects for tightening monetary policy ahead of a Federal Reserve meeting this week.

“The Celsius news added fuel to the fire, adding to the uncertainty in the market,” said Vijay Ayyar, vice president of corporate development and international at crypto platform Luno. “There is a lot of pressure on prices as we go into the week of Fed decision coupled with concerns on the protocols offering high-yield products.”

The meltdown is the latest blow to the cryptocurrency market and DeFi, its largely unregulated answer to traditional finance -- which, at its best, promises more control for users along with higher returns and less costs but also brings with it more risks and fewer safeguards.

In May, the collapse of the TerraUSD (UST) stablecoin and its sister token Luna captured most of the market’s attention, but one of the project’s main attractions for investors had been its promised interest rate, set as high as 20% for UST deposits in the Terra blockchain-based lending project Anchor. While Celsius is a centralized platform, with operations and staff that sets it apart from DeFi, its deep involvement in the space -- including an investment in Terra and multiple risky strategies designed to earn high yields it could then pass on to its users -- cast intensified doubts about its own viability.

Both TerraUSD and Celsius revolved around the prospect of super-high yields to keep up demand, which itself depended on a steady flow of new entrants feeding the system, or borrowing or other investment to pay the high rates. Celsius previously acknowledged its exposure in defunct TerraUSD, but said it was able to exit the crisis early on. Across the crypto space, however, demand for high-yielding lending protocols has slumped since Terra’s imposion.

Read more: Crypto Lender’s Woes Spark Dash by Rivals to Soothe Nerves

Tokens linked to lending and borrowing protocols slumped on Monday, with the Celsius native token plunging 50% to 23 cents as of 11:30 a.m. Monday in New York, according to CoinGecko. Celsius peers Aave, Maple and Compound slumped 12%, 15% and 13%, respectively.

“The plunge of Celsius’s token $CEL seems to be a realization of the contagion risk of UST/LUNA into similar financial tools,” said Burak Tamac, senior analyst for regulatory and on-chain at CryptoQuant.

Read more: Crypto Market Sinks Below $1 Trillion After Latest DeFi Blowup

The MVIS CryptoCompare Digital Assets 100 Index, which measures 100 of the top tokens, dropped as much as 17%. And the total market value, which topped $3 trillion in November, dropped below $1 trillion, with almost $1 trillion in losses coming in the past two months alone, according to CoinGecko.

Crypto lending has come under the regulatory spotlight, with BlockFi earlier this year agreeing to pay $100 million to settle allegations from the U.S. Securities and Exchange Commission and state regualtors that it illegally offered a product that pays customers high interest rates to lend out their digital tokens.

Read more: BlockFi to Pay $100 Million to SEC, States on Crypto Lending

A little over a day before Celsius announced its halt, Chief Executive Officer Alex Mashinsky appeared to counter speculation about a freeze on withdrawals, tweeting, “Do you even know one person who has a problem withdrawing from Celsius?”

In announcing the move, Celsius said: “We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.” It added that users will continue to accrue rewards during the pause.

The announcement landed in the midst of turmoil in crypto markets, with worse-than-expected US inflation data on Friday stoking expectations of faster interest rate increases, hitting riskier assets like digital tokens. Bitcoin has tumbled 50% this year, while Ether has lost about two-thirds of its value.

Read more: Celsius Crypto FOMO Lured Finance Pros Too: Lionel Laurent

Ethereum blockchain data shows that the largest single digital wallet holding CEL tokens is a wallet that belongs to Celsius itself, with more than 184 million CEL tokens, or 26.6% of the total supply in circulation. Mashinsky clarified in a weekend tweet that Celsius hadn’t been selling the token.

(Updates with added comment from Nexo in fourth paragraph.)

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