Five reasons Celsius customers may have to forfeit their crypto assets

Celsius Network Inc.’s fall from grace has robbed over 1.7 million customers of $4.7 billion in digital assets and deposits of cryptocurrencies, according to the company’s latest bankruptcy filings.

After the New Jersey-based crypto lender and rewards platform initially paused withdrawals, swaps, or transfers for its users in June, it voluntarily filed for relief under Chapter 11 of the US Bankruptcy Code a month later.

While the company is still operational and claims to have taken steps to preserve its assets, its customers can neither withdraw their digital assets from the company’s Earn or Custody programme nor earn rewards on their deposited cryptocurrencies.

Although not as great a failure as the Luna/Terra USD debacle, here are five misdemeanours that resulted in the crypto world’s second-biggest wipe-out of investor wealth in 2022:

Overreliance on deposits

Celsius Network held $22.1 billion in crypto assets, loans, mining assets, cash, and other holdings on its books as of March 30, 2022. Its own assets accounted for only $2.21 billion, while the rest were in the form of crypto assets of its users or loans provided to the company. Yet, the company traded in these crypto assets, stating that they were ‘opportunistic’ in nature.

It also admitted to making exchange-based and cash-and-carry trades, which could be the main reason for the liquidity crunch it faced in April.

$12.3 billion erosion

Celsius Network ascribed an erosion of $12.3 billion in its crypto holdings to a decline in their market value.

According to the company, it lost a total of $17.8 billion by July 14 but offered very little evidence for the reasons. Apart from $4.7 billion attributed to user withdrawals, loan redemptions, and crypto holdings liquidated by Tether, the company clarified that it lost only $100 million in crypto investments made on its own accord.

Since Celsius Network CEO Alex Mashinsky clarified that the company came out pretty much unscathed from the Terra, Luna, and Three Arrows Capital crashes, it seems unlikely that it hedged its crypto exposure and instead suffered from mark-to-market losses on derivatives or other risky trading instruments.

Cementing this notion was the 58 percent drop in the cryptocurrency market capitalisation on July 14 from levels on March 31.

Comparing this with the 85 percent drop in Celsius Network’s crypto holdings, another perspective could be that a major portion of the loss could be due to theft, fraud, or other malicious activities.

Transfer of holdings

Every retail customer that availed of Celsius Network’s Earn and Borrow programme also signed away rights to their staked or pledged crypto.

By explicitly mentioning that the title to crypto tokens or coins would be transferred to Celsius Network under its terms of use, the company insidiously earned the right to use, sell, pledge and even rehypothecate cryptocurrencies belonging to its retail customers.

Whether the company made any effort to inform every customer that deposited cryptocurrencies in either programme is dubious and down to speculation.

Unsecured borrowing, lending

One of Celsius Network’s key business segments was institutional lending and borrowing, although their size or volume remains unknown.

The company advanced money to institutional clients such as hedge funds and market-makers and secured them based on their individual creditworthiness. It admitted that its loan book consisted of secured, partially secured or completely unsecured loans, clearly as a result of this approach.

This overshadows the fact that the company’s subsidiary, Celsius Mining LLC, operated a healthy Bitcoin mining business that comprised over 43,000 rigs.

This seemingly paradoxical way of undertaking various businesses is a further sign of something sinister about the way in which Celsius Network operated.

Market manipulation allegations

One of the most vocal critics of Celsius Network has been Jason Stone, CEO of KeFi, a decentralised finance (DeFi) aggregator.

In the week prior to Celsius formally submitting its application for insolvency, Jason took to Twitter to blame the company for assuming naked market positions and not hedging to account for market fluctuations.

He also alleged that the entire company and its eight subsidiaries were acting in concert to siphon money from new users to pay off early-stage retail customers. Celsius had stated that it paid over $634 million in rewards on its deposits.

Considering that as of date, none of its retail customers can access these rewards, it does seem a bleak path ahead for the entire community of Celsius Network’s users.