Celsius Freeze on Withdrawals Craters Crypto Market

CelsiusWithdrawalsPaused

Crypto lending platform Celsius has frozen accounts of its 1.7 million users, further undermining trust in the digital assets space on a day with double-digit losses for Bitcoin and Ether and just weeks after the Terra collapse.

Celsius froze withdrawals, transfers, and swaps for their users on Monday citing  “extreme market conditions” according to a Medium post

The move comes at the worst time for traders who are looking to manage their portfolios as global markets plunge, including using assets to cover collateralized debt positions before they get liquidated. Now, Celsius clients are stuck during one of the worst market routs we’ve seen this cycle.

In the last 24 hours, Bitcoin has plunged almost 14% and Ethereum 16% as of early Monday in New York, according to CoinGecko. Celsius’s own CEL token has lost 22.48%.

Bank Run

There’s little doubt the funk in the markets has spurred a “run-on-the-bank” scenario, said Kevin Murcko, the CEO and founder of Coinmetro, an exchange based in Estonia, meaning demand for withdrawals on the Celsius platform spiked.

Celsius, which promises clients returns of as high as 18% on their crypto, deposited clients’ liquid assets in less liquid positions to earn yield. Speculation is mounting that the platform is having trouble unwinding those positions in time to meet clients’ demand for withdrawals, hence the need to freeze accounts.

On-chain records analyzed by The Block shows that Celsius has placed customers’ ETH deposits in Lido in exchange for Lido Staked ETH (stETH), a liquid staking derivative of ETH. The platform also pledged WBTC as collateral with MakerDAO and Compound and borrowed stablecoins which were used to earn yield in various DeFi protocols.  

Watcher.Guru reported that Celsius sent over $320M worth of crypto to trading platform FTX, and the purpose of said transactions remains unclear at this point. 9,500 WBTC was moved from Aave to FTX while over 50,000 ETH was moved to FTX.

Liquidity Squeeze

“I would like to believe that Celsius is merely facing a liquidity squeeze and will return to normal business operations in the near future,” Murcko told The Defiant. “However, if the issue is not resolved quickly, we might see another blow of confidence similar to the one that followed [the] Terra ecosystem’s collapse.” 

Speculation that the lender was strapped for cash has been circling for the past few weeks. Celsius was partly responsible for the crash of the Terra Ecosystem, according to a May 27 Nansen report. Their massive sale of UST triggered a stampede for the exit.

In a memo, the Celsius team wrote that it took this action to be “in a better position to honor, over time, its withdrawal obligations.”  Celsius assured customers that they will still accrue rewards during this pause. Celsius CEO Alex Mashinsky tweeted on Sunday that talking about Celsius freezes was spreading rumors and “misinformation”. 

Celsius competitor Nexo is apparently looking to take advantage of the situation. The lender extended a formal offer to acquire qualifying assets from Celsius after their freeze is over on Monday.

‘Degeneracy Behind The Scenes’

This episode shows the space needs more responsible practices from lending platforms, Chase Devins, an analyst at Messari told The Defiant. “You can’t promise people double-digit APYs without doing some serious degeneracy behind the scenes,” he continued.

“The fact they advertised their products the way they did to retail investors is deserving of the wrath that will be coming in the following months.”

Chase Devins

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