Celsius is not a bank. BlockFi, Voyager, and Nexo are not banks either. These companies are so removed from banking that they have all received cease-and-desist orders from U.S. regulators.
Customers can be forgiven for thinking these companies are banks because they provide de facto banking services: They take deposits, pay interest, and make loans.
In the U.S., one cannot simply get into the business of banking without being a bank, or some other form of financial institution. These cease-and-desist orders were the message from the regulator community that crypto firms should “cut it out”. The firms have indicated that they are in discussions with the regulatory agencies to understand the orders.
Today, we are seeing the consequence to consumers when unregulated (or underregulated) firms play in the highly regulated financial markets.
Within the last few days Celsius experienced what appears to be an old-fashioned run on the bank. For a variety of possible reasons, customers lost confidence in Celsius, and on Sunday evening Celsius halted customer withdrawals and those concerns increased.
It remains to be seen whether depositors will lose money. We already know investors in the Celsius token have–but there is evidence that customer confidence is shaken across the industry and the digital asset class.
Real banking institutions in the U.S. have safeguards in place to protect customer assets and maintain consumer confidence. Banks chartered in the U.S. have strong oversight and depository insurance, minimum capital ratios, and ready access to funding via the Federal Reserve Discount Window to help them avoid actions that have negative consequences for their customers.
A U.S. banking charter grants the institution powers to conduct the business of banking, and in return, the bank agrees to be a member of the highly regulated financial markets. All elements of the business are open for review. The regulators are constantly searching for weaknesses and will work with the banks well ahead of time to circumvent potential problems.
The hallmark of the U.S. banking system is that customers should always be able to access their funds.
Consumers can trust that their funds are guaranteed safe to the FDIC deposit insurance limits. Even more important than deposit insurance, the FDIC is empowered to take decisive action with troubled banking institutions to protect depositors. It can even sell the troubled bank to a healthy institution.
Banks are required to have their own capital in size proportionate to the overall size of the bank. To be considered well-capitalized a bank is required to have approximately $1 billion in capital to support $12.5 billion in assets. We do not know how much capital exists in the crypto pseudo-banks because unlike real banks, they do not publicly disclose their capital position.
Does Celsius have the capital to absorb losses? How are people to know? Only publicly available information can maintain confidence even in rocky times.
The business of banking may be overly simplified by defining it as the business of borrowing short term and lending longer term. Deposits are placed in the institution that they may be withdrawn within a reasonable time under all circumstances. On the other hand, loans tend to have longer durations and generally cannot be easily called.
When depositors are seeking their deposits back immediately, the bank may be forced into a situation where they need to unwind their longer-term loans or investments. Sometimes, this means taking a loss. This is when the minimum capital requirements become important because a well-capitalized bank should be able to easily maneuver through periods of drawdowns.
Sometimes, these drawdowns are more temporary, and the bank can rapidly instill confidence by meeting short-term demand. If a bank has solid assets and sufficient capital, it has access to considerable liquidity from the Federal Reserve.
So, what about Celsius, Voyager, BlockFi, and Nexo? Who provides that strong level of supervision? What are their capital positions? In the event of a surge in demand for liquidity, as Celsius is currently experiencing, where do they go? Or must they sell assets in a fire sale?
Sometimes there is really nothing new, and it appears that Celsius is in the middle of an old-fashioned traditional bank run.
Gene Grant II is the founder and CEO of LevelField Financial.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.
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