Celsius Says It Needs More Time To Recover Financial Position

Celsius froze withdrawals on its platform over a debilitating liquidity crisis one week ago. Now, the crypto lending network has said it needs more time to recover its financial position.

“We want our community to know that our objective continues to be stabilizing our liquidity and operations. This process will take time,” the troubled lender said in a blog on Monday. 

Celsius said it’s maintaining open communication with regulators and officials regarding its decision to pause withdrawals, swaps and transfers between user accounts. 

The company cited “extreme market conditions” for the suspension. It also paused Twitter Spaces and Ask Me Anything sessions so it can focus on other matters at hand.

“Acting in the interest of our community remains our priority and we will continue to work around the clock,” Celsius said.

Celsius generates revenue (and thus yield for its users) by rehypothecating customer deposits. But centralized lenders like Celsius can be forced to exit their various positions when withdrawal requests outweigh its liquid reserves. 

A liquidity crisis is borne when the assets generated by those exits still don’t meet withdrawal demand. Some Celsius users are worried their deposits might be lost along with Celsius’ capital, as the platform works to stave off its own liquidation.

“Liquidation has been an issue across markets, including crypto,” said Fernando Martinez, head of Americas at digital assets platform OSL. 

To help explore its financing options, Celsius reportedly hired banking giant Citigroup and law firm Akin Gump Strauss Hauer & Feld last week. 

Recent chaos in cryptocurrency markets has been exacerbated by players in the industry facing these kinds of financial difficulties. Investor anxiety unraveled as Celsius paused withdrawals and transfers on June 12, followed by hedge fund firm Three Arrows Capital facing potential insolvency. 

Babel Finance joined the turmoil by suspending withdrawals on Friday, citing “unusual liquidity pressures.”  

Troubles at Celsius and Three Arrows Capital were partly driven by exposure to Lido staked ether (stETH), a stand-in token for ether (ETH) locked inside staking protocol Lido Finance. 

StETH had mostly been considered a safe asset; effectively pegged 1:1 with ETH and backed by ETH staked inside Ethereum’s Beacon Chain. But an influx of ETH withdrawals from decentralized trading protocol Curve has rendered stETH more difficult to swap, leading its value to drop 6% below par.

In any case, at least five state regulators have opened urgent investigations into Celsius’ activities, in a bid to ensure such incidents don’t repeat.

This isn’t the first time Celsius has caught regulatory attention. In September 2021, Alabama, New Jersey and Texas regulators sent the firm cease and desist letters that said it offered unregistered securities (interest-bearing crypto accounts) in violation of state law and didn’t provide enough information as to what it did with their deposits.

Source: blockworks.co