6/19/22, 12:04 AM Celsius Is Crashing, and Crypto Investors Are Spooked - WSJ

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FINANCE

Celsius Is Crashing, and Crypto Investors Are Spooked

‘Looking back, it seems too good to be true.’ People with Celsius accounts are no longer able to
withdraw their money.

Celsius chief executive Alex Mashinsky criticized banks for paying low interest rates to clients,
favoring T-shirts that underscored his message.
PHOTO: PIARAS O MIDHEACH/SPORTSFILE/GETTY IMAGES

By
Gregory Zuckerman Follow
,
Vicky Ge Huang Follow
and
Hardika Singh Follow
Updated June 16, 2022 3:25 pm ET

A few months ago, Mike Washburn’s cryptocurrency investment looked like a winner.

Now he’s just hoping to get his money back.

SHARE YOUR THOUGHTS

What’s your outlook on crypto investments? Join the conversation below.

Mr. Washburn, a 35-year-old plumber in Otsego, Minn., had $100,000 in an account at

Celsius Network LLC, one of the largest lenders in the cryptocurrency world. Recently
widowed, Mr. Washburn said he and his two children moved in with his parents, and he

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planned to buy a house with his savings. The Celsius account offered him yield higher than
would a traditional bank account, and the company was well-known in the crypto
community.

On Sunday evening, though, Celsius said it was no longer allowing customers to withdraw
cash from their accounts. On Tuesday night, The Wall Street Journal reported that Celsius
hired restructuring attorneys to help handle its mounting financial problems.

Now, Mr. Washburn is anxiously waiting to hear what happens to his account.

“If I don’t ever see that money again, it will set me and my children back by years,” Mr.
Washburn said.

“Deep down I don’t believe there’s going to be a good outcome, but I hope I’m wrong,” he
said.

Prices for bitcoin and other cryptocurrencies have been plummeting as interest rates rise
and risky assets turn unpopular. The difficult market is forcing once-highflying digital-
currency companies to slash jobs, halt mergers and bar clients from withdrawing digital
investments, shocking investors.

Individual investors might not have realized when they put money in Celsius that they
were giving the company an unsecured loan with little legal protection. Crypto companies
such as Celsius look like banks in some ways, but they lack the investor oversight and legal
protections built into banks and brokerages.

In a blog post Sunday evening, Celsius said it was pausing all withdrawals, swaps and
transfers between accounts, citing “extreme market conditions.” The move froze $11.8
billion in customer assets, based on the company’s May report. On Wednesday afternoon,
the assets were still frozen, and Celsius founder and chief executive
Alex Mashinsky
tweeted that the firm was “working nonstop” on the issue.

It is one of dozens of unregulated lenders that have emerged in recent years promising
high returns to investors willing to lend their digital assets. Celsius, which claims about
1.7 million customers, paid customers annual percentage yields of up to 18.6% on
cryptocurrency deposits. Higher interest rates were available to those willing to accept
payment in Celsius’s own CEL token.

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Mr. Mashinsky launched the company in 2017, marketing Celsius as a safe alternative to
banks. The Ukrainian-born Mr. Mashinsky criticized banks for paying puny interest rates
to clients, favoring T-shirts that underscored his message, including one that read,
“Banks are not your friends.”

Like other lenders, Celsius accepted customer deposits of cryptocurrencies and lent them
to other users, including market makers and exchanges, to earn a return. Celsius also puts
customer deposits in high-yield, high-risk decentralized-finance investments.

How Celsius’s crypto lending process works:

Celsius puts customer deposits in

decentralized finance investments and lends
out funds to other users (including to
exchanges and market makers).

CELSIUS

Customer Yield

Customers lend money to Celsius earns a

Celsius in exchange for return from
yield. (This is essentially borrowers and
an unsecured loan). investments.

Source: News reports

Celsius faced a challenge, however, in earning a return above the yield promised to clients
while still allowing them to promptly withdraw their crypto investments. Celsius placed
at least $470 million in an investment that had plunged in value, according to blockchain
data and a person familiar with the matter. The terms of the investment product,

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managed by Lido Finance, prohibit Celsius from quickly removing its assets, adding to the
difficulties.

Vasiliy Shapovalov, a Lido developer, said he didn’t think the token was very risky.

Celsius accepted ether from clients and used it to buy at least 409,000 “Lido staked ether”
tokens, according to the person familiar with matter and blockchain data, that it in turn
lent out to earn a high return. Historically, such tokens have had roughly the same value
as ether because they represent the ether being used on the Ethereum platform to process
transactions and maintain chain security. Celsius can’t exchange its staked ether holdings
for ether until Ethereum makes the transition to its “proof of stake” model, but a deadline
for that move has been consistently pushed back.

Lately, though, Lido-staked ether has been trading at a discount of about 5%, according to
analytics company Dune Analytics. The decoupling began when cryptocurrency TerraUSD
recently collapsed, motivating investors to pull out of the most speculative assets.

The fall in value in these tokens has presented a problem for Celsius. If its clients were to
withdraw ether deposits en masse, the company would have to sell its staked ether
holdings at a substantial loss.

Celsius’s fortunes seemed to shift quickly. On Friday, the company said it hadn’t had any
issues meeting withdrawal requests and that it held “more than enough” ether to meet
obligations.

Matt Novak, 35, of Sacramento, Calif., first became concerned over the weekend when he
had trouble logging into his Celsius account. He tried again a few hours later with no luck.

Mr. Novak said his crypto investments in his Celsius account, about 5% in bitcoin and the
rest in the cryptocurrency Polygon, represented about 60% of his retirement funds. They
were worth about $93,000 early last week but were down to about $28,000 earlier this
week, he said.

Mr. Novak, who runs a mortgage-marketing firm, said he was attracted by the 17.5% rate
of return offered on his Polygon deposits at Celsius at that time. Before this week’s crypto
meltdown he estimated he had gained at least 50% on his initial investment.

“Looking back, it seems too good to be true,” he said.

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Celsius’s decision to freeze accounts sparked nervousness throughout the crypto world,
helping to send bitcoin and ether down about 15% on Monday. The digital assets are down
53% and 68% in the past year to date.

“Halting customer withdrawals is a huge deal,” says Matthew Sigel, the head of digital
assets research at Van Eck Associates, which manages three crypto funds. “It’s testing the
market.”

Individual investors in other cryptocurrencies are feeling their own pressures as prices
fall, with some receiving margin calls to provide more collateral for their leveraged
digital-currency trades. On Tuesday, data provider CoinGlass said about $690 million of
collateral pledged by about 160,223 retail traders had been liquidated over the previous 24
hours.

By Tuesday, Celsius’ CEL token had fallen 81% in the year to date, according to crypto
research firm Messari. When the token was falling on Friday, Celsius said “the price of
CEL is very often affected by market factors that are not related to the company’s
performance.”

Later that day, news broke that Celsius hired restructuring attorneys from law firm Akin
Gump Strauss Hauer & Feld LLP to look for possible financing options from investors and
other strategic alternatives, including a financial restructuring.

Securities held for customers by a registered brokerage, like Fidelity Investments, can’t
be touched in bankruptcy proceedings. Celsius isn’t a registered brokerage, though.

Securities and Exchange Commission Chairman

Gary Gensler
has warned that investors
who own cryptocurrency through trading platforms like the largest U.S. crypto exchange,
Coinbase Global Inc.,
aren’t protected the same way they would be if they invested
through a registered brokerage. In March, the SEC released guidelines instructing
publicly traded crypto firms to record the digital tokens they hold for customers as assets
and their obligation to the customers as liabilities.

In April, Celsius stopped offering the products to “nonaccredited” investors, or those who
don’t meet a certain wealth threshold, after being pressed by regulators.

In May, Coinbase said customers might lose access to their digital assets held on the
exchange if the company ever goes bankrupt. The biggest uncertainty facing the crypto

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industry is whether digital tokens are securities like stocks and bonds. The question is
being fought out in court. 

Some of the larger, high-profile investors and crypto founders had been selling their
investments over the past year, locking in profits well ahead of the recent selloff.
Billionaire
Mike Novogratz’s
Galaxy Digital Holdings Ltd
, has been a seller of various
cryptocurrencies, according to company filings and people close to the matter. Earlier this
year, Mr. Novogratz got a tattoo on his biceps of the cryptocurrency Luna and spoke
positively of various cryptocurrencies at industry events.

Mr. Novogratz had told the Journal that while he had been publicly optimistic about the
future of Luna and other cryptocurrencies, he made sure to include words of caution.

In recent days, digital-currency and blockchain companies have been laying off
employees. On Monday, crypto lender BlockFi said it was reducing head count by about
20%. On Tuesday, Coinbase said it was cutting almost a fifth of its staff because the
company had grown too quickly and a potential recession “could lead to another crypto
winter.” Four top Coinbase officials have collectively pocketed more than $1 billion by
selling shares since the cryptocurrency exchange’s public listing in Spring 2021. So far
this year, the company’s shares have declined 78%.

“These Coinbase executives maintain large positions in the company, reflecting their
commitment to our long-term opportunities,” a Coinbase spokesman said last month.

The Texas State Securities Board opened an investigation into Celsius over its decision to
freeze customer accounts, Joseph Rotunda, the board’s director of enforcement, said
Thursday. The board is working with New Jersey, Kentucky, Alabama and Washington.
Reuters earlier reported on the opening the investigation.

Plunging cryptocurrency prices also are complicating the plans of firms that deal in
bitcoin and related areas. So far this year, there have been 42 announced acquisitions of
crypto-related companies, according to Dealogic. But it has been about two months since
the last deal was announced, suggesting some companies may find it hard to reach or
complete mergers until markets clear.

—Orla McCaffrey and Paul Vigna contributed to this article.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

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6/19/22, 12:04 AM Celsius Is Crashing, and Crypto Investors Are Spooked - WSJ

Appeared in the June 17, 2022, print edition as 'Crypto Lender Investors Fear Crash.'

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