August 15, 2020

Market News

Are there any irregularities in the crypto lender Celsius?

It's July 17th, 2020 and Alex Mashinsky, CEO and co-founder of Celsius, is in the middle of a YouTube livestream. The reason for the stream is clear, because more and more voices are being heard about the business practices at Celsius. Critics recently came to the conclusion that Celsius does not use customer deposits prudently. But what is the criticism and how clean is Celsius working in this case?

Celsius CEO keeps livestream on YouTube

At the moment, one topic dominates the blockchain sphere – DeFi. Since the beginning of the year, investors have invested approximately $ 3 billion in fresh capital in various services. Let's take a look at the P2P market in Asia, which boomed a few years earlier than in Europe, and then there are some parallels. The market volume grew incredibly quickly, almost all providers received customer funds and the providers take advantage of this opportunity. It remains to be seen whether we will experience something comparable with DeFi, but certain parallels cannot be denied.

Celsius, which is particularly known for its lending business, is now the focus of investors. There have recently been doubts about the use of funds – this has prompted investors. As a result, CEO and founder of Celsius, Alex Mashinsky, had to reassure investors. This happened on July 17, 2020 as part of a livestream on YouTube.

Mashinsky pointed out that the critics were only afraid, uncertainty and doubt (FUD). He also makes it clear to the Celsians, as investors are called Celsius, that all financial resources are used carefully.

How does the Celsius business model work?

Basically, Celsius's business model is comparable to that of other peer-to-peer providers such as Mintos or Bondora. This is how Celsius arranges loans to potential borrowers. The capital does not come from a central bank, but from investors who make their assets available. The loan issued and the interest paid by the investor differ, so that Celsius can generate a return using the interest rate differential.

Unlike a bank and a classic P2P platform, Celsius only uses cryptocurrencies. In addition, there is no state deposit insurance, so users can suffer a total failure. According to the company, the capital invested in June 2020 was already more than $ 1 billion.

Accordingly, the entire lending business is in the hands of Celsius. According to Mashinsky, there are strict guidelines here that increase the security of the lending business.

“If you use other platforms like Celsius, the main thing that interests you is who the borrower is. […] Celsius does not grant unsecured loans. “- Alex Marshinsky

As can now be seen, the statements contradict the statements of a Celsius representative. Accordingly, the company also grants unsecured loans on a limited basis. In the first step, Marshinsky has clearly spoken out against the existence of such unsecured loans. However, there are now no official statements about the size of the loan portfolio, so that an assessment of the risk is not possible.

According to Anastasia Golovina, an external press spokeswoman for the Ditto PR agency, the unsecured loans do exist. Although we are talking about less than one percent of the total portfolio, the statements made by Marshinsky are therefore not true. According to Golovina, the loans were granted to companies with a high level of capitalization. Even if it is only about seemingly small amounts, it shows that the company is not transparent with its investors.

Lending in the focus of crypto investors

If we look at the overall market, we can call Celsius one of the most interesting and important companies in the DeFi market. In the past two months alone, the company has raised $ 20 million from BnkToTheFuture.

Overall, it can be seen that the crypto lending market is growing rapidly. Lending is an interesting option for many investors because their crypto assets alone can generate returns. Investors do not have to liquidate their assets and can tap an additional source of income. Overall, it can be assumed that this development will contribute to increasing liquidity and pricing in the crypto market.

Nevertheless, this business model is also very risky. At Celsius, investors may currently need to consider three very specific risks:

  1. Credit risk
  2. Exchange rate risk
  3. Celsius transparency

After all, a large part of the Celsius loans are secured with BTC collateral. If the value of the security falls, then margin adjustments must be made. However, insiders recently indicated that the company has now also invested in perpetual swaps, which are derivatives similar to the future. Since a perpetual swap has no end in time and instead settles periodically on an index, the risk at Celsius increases significantly.

“Our business is to lend coins to institutions. Celsius mainly lends to large institutions and sometimes to stock exchanges that provide both of us with collateral. ”- Alex Mashinsky.

Celsisus has the right to pledge the collateral

The possible re-pledging of the invested coins in Celsius is particularly critical. The terms of use of the lending platform indicate that Celsius has the right to repledge the invested assets. It is not defined in more detail whether this right relates only to the actual investment or to the assets already pledged.

Celsius - The crypto lending platform @ Celsius.Network
Celsius – The crypto lending platform @ Celsius.Network

"In return for the remuneration earned on your account and the use of our services, you grant Celsius the right to […] pledge, repay, mortgage, further pledge, sell, lend or otherwise any amount of these assets to transfer or use for any period of time. "- Extract from the Celsius Terms of Use.

It is therefore not surprising that numerous users critically question the company's business model. In addition, the promises of Mashinsky, who promised a fair interest income for all people in 2018, can be critically evaluated. In theory, it is possible that investors will not be able to access their assets in the event of a liquidity shortage, since these have already been pledged again.

Annual report leaves questions about the Celsius ICO open

Another point of criticism that affects Celsius and the management is the transparency in accounting. The $ 20 million raised by BnkToTheFuture and Tether is not the only capital the company owns. Rather, as part of its ICO, Celsius launched the CEL coin. Investors were able to exchange Bitcoin and Ether for the new DeFi Coin.

According to Mashinsky, the company was able to collect around $ 50 million at the time. However, the company's annual filings with the British registrar companies house show only proceeds of $ 25 million. According to the company, this accounting difference can be traced back to tax reasons. Nevertheless, Golovina also confirmed that the sale did not take place in the same month as the funding.

At the time of funding, however, we were able to see the highest prices on the market, so it can be assumed that Celsius did not take advantage of the hype at the time.

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Conclusion: Celsius network leaves room for criticism

If we look at the DeFi market, it is a particularly exciting business area in the middle of the crypto industry. However, Celsius also leaves plenty of room for criticism, because from the perspective of investors, non-transparency is often a knock-out criterion.

However, the business model itself is very interesting because investors can keep their coins and tokens and earn a return at the same time. According to the company, the loans are secured – even the small number of unsecured loans should not have a particularly large impact here. Of course, investors take an exchange rate risk here because the income is paid out in CEL. However, the token has had a good return in the past.

However, the part with the re-pledging of the investments is particularly critical. In the past, the subprime bubble was reassigned as collateral – as a result, we experienced the 2008 financial crisis. Such a scenario is out of the question because Celsius has no comparable impact on the market. Ultimately, however, this way of doing business could shake the core of the platform. If you want to invest in Celsius, you should aim for broad diversification across multiple lending platforms. This is the only way to reduce loan losses with individual providers.