Following the news cycle of crypto scandals is a bit like unpacking stacked Russian dolls. Simple explanations and surface realities are rarely sufficient to explain the workings. As the scandals unfold, the central narrative has another one underneath and another one. A fresh cast of characters – in this case, mostly related to tokens – is introduced with each layer. And so on.

Take the case of Celsius.

The London-based company offers a suite of services, from lending against staked cryptocurrencies to loans to trading, to investors. It stopped withdrawals from its platform yesterday to “protect and preserve assets to meet our obligations to customers” and cited “extreme market conditions” for its decision. Its announcement is widely believed to have accelerated a price crash that was already roiling crypto markets.

Fearful investors, wary of another massive crypto crash, bid down the price of its native token CEL by 50%. The token’s price had shot up to $7.73, from $0.25 a year earlier, by June 2021. As of this writing, it is changing hands for $0.34.

Considering the multibillion-dollar valuations of Bitcoin and Ethereum, the price crash of a cryptocurrency valued at $80 million in the markets should not cause much worry of contagion. That is, until you unpack the nesting narratives within Celsius.

The Nesting Narratives of Celsius

On the surface, Celsius is like any other lending and trading platform. But crypto’s complex web of relationships means that it is underpinned by a network of tightly knit dependencies.

Tether, the world’s biggest stablecoin by market cap, is an investor in the platform. Celsius has invested $54 million in Core Scientific – a bitcoin mining company. The latter is a publicly listed outfit and had 8,947 Bitcoin on its balance sheet, according to Bitcoin Treasuries. In addition to this, Celsius has invested in Rhodium Enterprises and Luxor technologies to bolster its bitcoin mining capabilities. The company also mines its own bitcoin. CEO Alex Mashinsky told crypto publication Blockworks last year that the company was running 22,000 ASIC systems to mine the cryptocurrency.

Celsius is a member of crypto liquidity pools that commingle crypto assets and promise exceptionally high returns for some tokens. For example, Celsius promised weekly returns as high as 18% for Synthetix, a crypto derivative with a market cap of $202.69 million as of this writing, through its Earn Rewards program for institutional investors. [The platform offered interest rates that ranged from 3% to 8% for Bitcoin and Ethereum].

According to online publication The Block, Celsius also had “substantial” exposure to Terra blockchain, the site of one of the biggest crashes in crypto history. It had parked at least half a billion dollars in Terra’s Anchor protocol and withdrew those funds during the last week of May.

Another Russian doll nesting inside the Celsius ecosystem is Staked Ether. The token is a unit of account at Lido – a platform that creates markets for staked assets – and trades at par with Ethereum’s ether. Reports claim that Celsius has large holdings of the token. The value of those holdings crashed yesterday after stETH lost its peg to ether, leaving Celsius scrambling to make up for its losses. Celsius’s leveraged positions in other money markets like MakerDAO is also under pressure, according to Twitter.

To further add to investor fears, Celsius recently warned investors about regulatory risks on its platform. The platform asks users to “Unbank Yourself” but, for all practical purposes, functions like a bank: it is a centralized entity that takes customer funds and generates returns using their money.

But Celsius remains unregulated across most of its operational jurisdictions. It has already been served notice by regulators, who claim that it is offering unregistered securities through its Earn Rewards program, in Texas, Kentucky, and New Jersey. The Securities and Exchange Commission (SEC) is also said to be looking into the company’s operations.

Will Celsius Cause a Crypto Crash?

For all its web of relationships with other entities in crypto, Celsius’s sphere of influence may be limited.

As with most cryptocurrencies, ownership of the Celsius token is highly concentrated. According to statistics from crypto analytics firm Dune, six addresses hold 85.6% of all Celsius tokens in circulation.

While CEL’s price has crashed, there is no indication that these investors have sold their holdings yet. In fact, its monthly centralized exchange inflows, or the numbers for tokens sold as whales exited their positions, peaked in January this year meaning investors may have already booked their profits.  

A contagion can also result from massive selloffs of holdings. Celsius’s bitcoin holdings are sizeable – more than 150,000 based on recent reports – but unloading them on the market might, at best, result in a downward spiral for a couple of days. It may not possess enough momentum to cause a prolonged market crash.

Finally, there’s the regulatory risk. Can federal and state agencies shut the platform down? The chances are unlikely. Celsius is not entirely unregulated and complies with AML regulations. Unlike other crypto entrepreneurs, who decry regulation, Celsius CEO Mashinsky has earlier said that regulation is a good and not a bad thing.