Jun 14, 2022 - Economy

Celsius freeze puts users with money in tough spot

Illustration of the Celsius logo frozen, with icicles.

Illustration: Shoshana Gordon/Axios

Centralized crypto lender Celsius rocked its customers' worlds Sunday night after freezing withdrawals and other transactions on the platform, citing "extreme market conditions."

Why it matters: The company is testing the terms of its user agreement that allow it to close the gate on users who are pulling funds out, plus those making swaps or transfers.

Details: Some customers responded to Celsius' announcement on Twitter, saying they were stuck in a loan limbo of Celsius' making — unable to transfer money they have sitting in their Celsius accounts to post additional funds and make good on their loans.

  • A tweeted screenshot showed that Celsius liquidated a customer's collateral after the freeze prevented them from resolving their margin call.
  • All attempts at recourse pointed to the help desk hotline 1 (866) HODL-NOW.

Catch up fast: Celsius' promise to its 1.7 million users was "buy, sell and hodl" and hodlers could earn crypto on their crypto held on the Celsius platform.

  • Via Celsius, customers could hold a token they like (bitcoin or maybe even the firm's CEL) and earn more of it through Celsius. Customers could also take out crypto-collateralized loans to buy more coins.

There were financial incentives for retail users to earn the shop's native token.

  • In the Celsius app, a customer might be offered a choice of either 7.1% interest if earning in USDC, or 9.3% for CEL.
  • Some offerings promised yields of 18%.
  • Meanwhile, the best rates offered by traditional banks in savings accounts are a sliver of that.

There are other crypto lenders like Celsius that act like "neo banks" and use customer funds to lend and borrow — that's how they make money. They also have user-agreement clauses that can be invoked to protect themselves.

What's happening: Imagine you were a sneaker enthusiast. You have an expansive collection that deserves to be seen — and for a price!

  • So you work with KickUs who holds your expansive collection of sneakers, charges other people for wearing them and gives you a part of the cut.

Now imagine that you wanted those sneakers back, but KickUs said — "sorry bud, it's bad timing for us."

  • Worse yet, imagine you posted some of your sneakers as collateral for a loan on the platform (if you couldn't repay your loan, KickUs would sell your sneakers).
  • The value of those sneakers backing your loan declined, but no sweat — you just have to post a few more sneakers from your account as collateral. But Imagine KickUs didn't allow you to make that transfer, and instead just... sold the sneakers.

The intrigue: Celsius' CEL tokens were already down about 80%+ year-to-date on June 1, before the announced freeze.

  • Tokens were trading around 27 cents as of Monday evening.
  • Remember the firm's $50 million May 2018 ICO?

Flashback: Celsius mid-April changed the terms of its service to its US customers, only allowing accredited investors (read: $1 million net; $200K disposable) to add new digital assets to their accounts and earn rewards on them, explaining they had been in "ongoing discussions" with regulators.

  • In May Celsius said it filed confidentially to take its mining business public.
  • Regulators on the state level homed in on Celsius late last year,. Those on the national level reportedly did too.
  • The Hoboken-headquartered firm was co-founded by Alex Mashinsky, who is known for being among the inventors of VOIP (Voice Over Internet Protocol) which enables people to communicate over the internet.

What they're saying: Celsius did not respond to an emailed query.

  • "We believe that our decision to pause withdrawals, Swap, and transfers between accounts is the most responsible action we can take to protect our community," according to Celsius' published statement Monday.

What others are saying: "What will define the next decade? There is nothing bigger than the Terra fiasco and then, Celsius," Chase Devens, an analyst at Messari tells Axios. "You have retail user funds getting wiped out and not a lot of transparency on what happened."

  • Gurgavin Chandhoke, an Ontario-based investor, on June 4 tweeted that he sold out of his Celsius account. He was "sketched out" weeks prior, Chandhoke tells Axios and pulled roughly CAD $390,000 in USDC over multiple transactions in May, screenshots shared with Axios show.
Go deeper