More Celsius Filing Takeaways

Celsius started off as a simple crypto lending firm. Or at least that’s what I was told when I met its CEO Alex Mashinsky in 2018 at the Consensus conference. Over the years, its business has morphed into that of a bank, a crypto miner, and a custodian among others.

Another filing by Mashinsky attempts to shed some light on the tangled setup of Celsius. But it reads pretty much like a Ponzi scheme. Alternately, it could be construed as a thought experiment since most money floating around in cryptocurrencies anyway is not derived from actual revenues or their utility but from future expectations or possibilities.

The company denies that it operates bank accounts in the filing. Then it proceeds to describe its operations as a bank that takes customer deposits and makes money off them by investing them in different instruments, such as liquidity pools and decentralized finance (DeFi) protocols.

That said, the future for Celsius might be very different from its current one: it is placing bets on rising demand for cryptocurrency custody and mining.

Here are some interesting notes from the filing:

  • Around 600,000 users or less than half of its claimed 1.7 million users participated in the Earn program on its platform. The program offers annual yields of between 4.5% to 5% on cryptocurrencies. It is safe to assume that users of the program have a high net worth because it is only available to foreign users and accredited users in the US. The company admitted in its filing that it holds the title to assets deposited by users and is allowed to rehypothecate them to various platforms.
  • The only way to avoid transferring ownership of your cryptoasset to Celsius’ products is to enroll in its custody solution that was started on April 15 this year. By July 10, that business had 58,000 users and assets worth $180 million. Prime Trust, a leading crypto custodian, worked with the company until last year, when it broke off the relationship citing Celsius’ “endless” rehypothecation of user assets on its platform. The introduction of a custody solution, unfortunately, is no guarantee for the return of your assets from Celsius. This is because all assets on its platform are commingled, meaning they are mixed and used for various investment activities. Celsius says it will return the ‘same type’ of digital asset to its custody services customer. Within the context of cryptocurrencies, the meaning of ‘same type of digital asset’ is unclear because all of them have wild price swings and claim to have unique properties and features. [This, despite the fact that a majority are minor modifications of the same codebase].  
  • While Celsius has stopped processing new customer accounts and paused withdrawals, the company claims that existing users continue to “transfer their digital assets” onto its platform and “may continue to do so.” The company laughably claims that this is “a feature of the underlying blockchain infrastructure” and cannot be “prevented.” It is a good thing, though, for Celsius’ business because it means that Celsius’ assets under management may continue to grow even as it undergoes a restructuring. Indeed, some statements in the filing hint at survival and, even, a reinvention of the company. For example, Celsius is bullish on its mining business. The New Jersey company owns 80,850 mining rigs and 43,632 of those rigs are in operation generating 14.2 bitcoin per day. In 2021, it mined 3,114 bitcoin and expects to mine 10,118 coins of the cryptocurrency this year. It also expects to have 110,000 rigs online by 2023. Considering bitcoin price trajectories and its growing liquidity, Celsius’ bets might pay off.   
  • Celsius’ current problems are more a result of the downturn in cryptocurrency markets than a product of its exposure to toxic entities in the crypto ecosystem. User liabilities, amounting to $4.7 billion, constitute the biggest chunk of its debts. Presumably, most of that debt is owed to accredited users and institutions since only 300,000 of its claimed 1.7 million users have account balances greater than $100. Three Arrows Capital, the failed hedge fund and crypto’s biggest casualty, owes $40.6 million to Celsius. The company also suffered a minor $15.8 million loss due to activities related to Luna. The liquidation of a $841 million loan from Tether resulted in a loss of $97 million on its books. Celsius also holds 410,421 staked Ether (stETH) on Lido Finance. It is earning an APY of 5% on the ether. stETH lost its peg with ether in June, precipitating the current crisis at Celsius. After Ethereum’s Merge, which is expected to finally happen in September, it will get its Ether back from Lido. Ether’s price has jumped by 12% in recent days.   

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