The Celsius native token CEL collapsed on Monday, losing over half its value after the crypto lender froze transactions amid a virtual run on the bank.
Early on Monday, Celsius rocked the crypto community and sent the price of Bitcoin to December 2020 lows after it warned in a Medium post it would no longer honor requests for transfers or withdrawals for an indefinite period of time. The decision was taken to “stabilize liquidity” while it took steps “to preserve and protect assets,” prompting a backlash from customers fearing their funds could be lost.
Its CEL token promptly plunged by more than 50% to trade at $0.18, giving it a market cap of just $76 million, according to CoinGecko. This represents a near total collapse from the heady days of its June 2021 peak, when it fetched a price of $8.01 and market cap of $3.4 billion.
Launched in March 2018, CEL is one of the many so-called ERC-20 tokens that runs on the Ethereum blockchain. The appeal of holding one of the 423 million CEL currently in circulation was generating higher passive income for users and lower costs for borrowers.
Much like any bank, Celsius offered customers a yield on their interest-bearing deposits. The rate received would increase if they accepted it in the form of CEL tokens instead of rival tokens. Likewise customers would receive up to a 25% discount on all their interest payments if they opted for using CEL.
“Think of it as a rewards program,” states the company on its website.
Monday’s admission it could not meet its financial obligations is a further blow to sentiment in crypto assets—and potentially fatal to the business aspirations of Celsius founder Alex Mashinsky, who flatly dismissed concerns of liquidity problems on Sunday.
Mashinsky, who claims to have turned down Google founder Sergey Brin’s request for venture capital in 1998, had once described consensus-driven, peer-to-peer consumer credit as the next big revolution after Ethereum’s introduction of smart contracts—programs that can execute crypto transactions without human oversight.
In a reference to internet-enabled voice communications like Skype, he termed this killer app “Money over Internet Protocol”, or MoIP, where the word money replaced voice. In advertisements, Celsius appealed to customers looking to sever all ties to Wall Street with the motto “Unbank Yourself.”
No lender of last resort
Earning money through long-term loans while refinancing through a steady stream of incoming customer deposits becomes an inherently risky proposition when there is a fundamental loss of confidence in the underlying system of credit, however.
The crypto market has been in a prolonged bear market ever since the Federal Reserve began to warn that to combat red-hot inflation it would roll back the unprecedented amount of money it had issued during the pandemic.
The complete collapse of Terraform Labs’s dollar-pegged algorithmic stablecoin TerraUSD—backed only by confidence in the value of the company’s own governance token Luna—further shattered trust. Finally, sky-high U.S. inflation figures announced on Friday launched a stark retrenchment in cryptocurrency over the weekend, with Bitcoin and Ether falling below key technical support levels.
Mashinsky’s critics, many of whom were Bitcoin bulls ideologically opposed to centralized finance (CeFi) models like Celsius, had been pointing to the crypto lender as a potential contagion risk for the still fledgling digital asset market.
That is because unlike with traditional commercial lenders, the unregulated crypto industry lacks a central bank as lender of last resort to step in and either provide liquidity if a company is solvent or enact an orderly wind-down of operations if not.
This prompted Ethereum creator Vitalik Buterin to propose something similar to the Federal Deposit Insurance Corporation (FDIC) following the Terra-Luna crash as a way to rebuild trust and confidence in the system.
Whether Mashinsky’s risky gamble can possibly work, or whether all trust in Celsius and potentially other similar financial services providers will soon evaporate, remains unclear.
Centralized exchange Coinbase saw its stock tumble after admitting last month that all custodial funds it holds on behalf of its users could be effectively expropriated to pay back creditors in the event of default.
Responding to Celsius’ Medium post, a a user named Hikari warned Mashinsky would not achieve anything ultimately apart from scaring away his customers: “Locking withdraws is the worst action a finance company might do. Even if it’s honest, once the withdraws are restored, of course everybody will take their money away.”
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