Celsius had the dual risk profile of traditional banks: report

Key learning points

  • A new report from The Wall Street Journal claims Celsius was taking significantly more risk than it had publicly hinted at.
  • Before attracting new funds last summer, the asset-to-equity ratio was reportedly 19:1 — nearly double that of the average US bank.
  • The documents, seen by The Wall Street Journal, are also said to reveal that Celsius has sold collateral loans and re-hypothesized the collateral posted.

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Contrary to Celsius CEO Alex Mashinsky’s claims that Celsius “wasn’t taking a huge risk,” a new report from The Wall Street Journal claims that the cryptocurrency lender had more than double the risk profile of the average US bank.

Celsius took more risk than banks, WSJ claims

Celsius investor documents have revealed that the cryptocurrency lender had nearly twice as much leverage as traditional US banks, The Wall Street Journal has reported.

According to a report published Wednesday, the beleaguered cryptocurrency lender had about $19 billion in assets and $1 billion in equity before raising new funds last summer. This brought the asset-to-equity ratio, which is generally regarded by regulators as a benchmark risk indicator, to 19:1. Traditional US banks have a median asset-to-equity ratio of approximately 9:1, indicating that Celsius had twice the leverage of regular banking services at the time the data was collected.

In addition, investor documents cited by The Wall Street Journal would show that Celsius sold collateralised loans, forcing corporate borrowers to provide approximately 50% collateral for their loans. The report alleges that Celsius then used the collateral to borrow even more money. This update contrasts Celsius CEO Alex Mashinsky’s numerous claims that the company had not provided collateralised loans. Mashinsky has also repeatedly claimed that his company took significantly less risk than banks while delivering significantly higher returns to its depositors.

For example, Mashinsky related: CoinDesk in July 2020 that “Celsius does not provide unsecured loans” because “that would take too much risk” on behalf of its depositors. Moeover, in a debate in November 2021 with Bitcoin skeptic Peter Schiff, Mashinsky said Celsius was taking a big risk with its lending practices. “We’re not taking a huge risk,” said Mashinsky, who answered Schiff’s question about how Celsius was able to generate such high yields.

On June 13, Celsius stopped all withdrawals, swaps and transfers from clients, citing “extreme market conditions”. The move came amid a significant market downturn that led to a “bank run” on the company’s deposits and the inability to honor withdrawals from customers due to liquidity issues. It is widely speculated that a primary cause of Celsius’s liquidity crisis is the liquidity mismatch between the market liquidity of assets such as staked ETH and the funding liquidity of liabilities such as ETH. In order to generate returns on its ETH deposits, Celsius would have staked the ETH on Ethereum’s Proof-of-Stake-based Beacon Chain, which cannot be undone until the blockchain completes its “Merge” to Proof-of-Stake. Betting on the Beacon Chain can therefore prevent the company from honoring ETH deposits.

The move to stop withdrawals to protect depositors has still not been reviewed and the company has: reportedly hired restructuring advisors to advise on a potential bankruptcy filing. Until it ran into liquidity problems earlier this month, Celsius was one of the largest cryptocurrency lenders, with about $20 billion in assets under management at its peak.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies. Crypto Briefing has previously run sponsored content from Celsius.

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