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Crypto lender Celsius is 'risking insolvency' after it pauses withdrawals

Crypto lender Celsius Network said on Sunday evening it would pause all withdrawals and transfers for customers as crypto assets continued to get battered.

“Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, swap, and transfers between accounts,” Celsius Network said in their statement. “We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.”

Pausing account withdrawals is a drastic action, according to L.P., a pseudonymous crypto entrepreneur and investor who started and runs the crypto-focused investor protection and educational resource,

“If they paused withdrawals especially considering these market conditions, it's fair to say they are risking insolvency,” said L.P.

New virtual money concept, Gold Bitcoins ( btc )  is Digital crypto-currency use blockchain Technology for
New virtual money concept, Gold Bitcoins ( btc ) is Digital crypto-currency use blockchain Technology for (Jirapong Manustrong via Getty Images)

Between Friday and Sunday evening the total market capitalization for crypto assets sold off by more than $162 billion, a drawdown of 13.4% from $1.19 trillion to $1.03 trillion according to Coinmarketcap.

Since the beginning of the month, bitcoin has tumbled 14.3% from $31,589 to $27,064, an 18-month low for the asset. Ether has taken far worse losses, dropping 25.5% from just below $2,000 to a low of $1,462 as of Monday morning.

Celsius Network’s CEL token has plummeted more than 50% in the last 24 hours, according to Coinmarketcap.

The weekend’s downturn follows the latest inflation reading for May released on Friday that showed consumer price growth accelerated during the month, matching March’s 40-year high increase. That revived fears that the Federal Reserve will need to hike short-term rates faster than expected, potentially risking a recession.

As for Celsius, its future remains unclear.

After closing its Series B raise in November last year, Celsius Network held a $3.5 billion pre-money valuation and Celsius CEO Alex Mashinsky claimed the company held $28.6 billion in assets under management. Last month a report from Canadian investigative publication, The Logic, found that Celsius’ depositor holdings dropped to $12 billion between its Series B raise and the end of May.

Additionally, a recent report by the blockchain analytics firm, Nansen, showed Celsius Network and a handful of other institutional-sized investors sold their holdings of Terra’s algorithmic stablecoin, UST, early into its collapse.

According to the report, between May 7 and 10 a wallet linked to Celius moved $225.9 million from Terra’s flagship lending app, Anchor Protocol.

Nansen analysts have also indicated that Celsius may have “significant ETH liabilities.”

Celsius Network did not immediately respond to Yahoo Finance's request for comments about its solvency, UST losses, or ether holdings.

Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021. REUTERS/Dado Ruvic/Illustration
Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021. REUTERS/Dado Ruvic/Illustration (Dado Ruvic / reuters)

According to its terms of use, customer funds deposited in Celsius’ Earn and Borrow services aren’t recoverable in the event of bankruptcy or otherwise if the company cannot repay its obligations.

“You may not have a right to any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws,” the terms state.

The crypto lending business

Loan risk and transparency can vary widely between crypto lending platforms. Unlike Celsius, the crypto lender Nexo reports real-time attestations of its reserves. Following the Celsius announcement, Nexo stated over Twitter it has submitted a formal offer to acquire Celsius' assets.

While high-yield rates offered by Celsius and other crypto lenders have dropped significantly over the past year, the returns are still much higher than traditional savings accounts. Lenders have said they are able to offer such yields by lending customer funds out at a higher interest to institutional investors, particularly in the decentralized finance (DeFi) space.

Because these services are marketed as alternative savings accounts, U.S. federal and state regulators have argued that high-yielding crypto accounts are unregistered securities and therefore warrant more investor disclosure and oversight since last year.

In that time, state regulators of Alabama, Kentucky, New Jersey and Texas took legal action against Celsius Network, claiming the firm offered residents unregistered securities.

In mid-February, crypto lender, BlockFi, agreed to pay $100 million in fines to the Securities and Exchange Commission (SEC) and other state regulators for offering unregistered securities.

While the situation is still developing, halting withdrawals may not be “doomsday” for Celsius if it could try to “trade out” of the situation, L.P. of said. But that could also risk steeper losses and the ire of regulators. As of late January, the company is already under the SEC’s microscope, according to a report in January from Bloomberg.

“I suspect we are going to have to wait for a lawsuit to bring clarity,” L.P. said. “It's a blackbox.”

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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