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Three US States Target Celsius Network as The Company’s Interest-Earning Crypto Accounts Draw Concerns

Various US states recently took action against the cryptocurrency lending platform Celsius Network, accusing the firm of providing residents with unregistered securities.

On Friday, September 17, Texas securities regulator – the Texas State Securities Board – filed legal action against Celsius Network, expecting the firm to explain why it should not be ordered to stop providing its products to state residents. The court hearing is scheduled to take place on February 14, 2021.

Also, on Friday, New Jersey securities regulator – the New Jersey Bureau of Securities – ordered Celsius to stop providing some of its products, which the state considered unregistered securities. Alabama also gave a similar order demanding that Celsius show why it should not be barred from providing its products within the next 28 days.

As of September, Celsius had more than $24 billion in “community assets.” The crypto firm stated that such assets under its management would make it the world’s largest interest-account provider and cryptocurrency lenders, if not the largest. The company provides customers with a yield of almost 9% for deposits of US dollar stablecoins like USD Coin and Tether, as much as 6.2% for Bitcoin and varying rates of interest on other cryptocurrencies.

Meanwhile, Celsius and other firms offering cryptocurrency interest accounts have stated that they can pay such high yields because they lend out the deposits at even higher rates to institutional investors, which need to borrow cryptocurrency to carry out their trades like to engage in arbitrage or short the market.

However, national and state regulators have stated that the firms are likely breaking the law and said that the products, which sometimes are marketed as an alternative to bank savings accounts, should be registered with their agencies. The registrations would give more details on disclosures to investors as well as agency oversight.

Cryptocurrency Savings Accounts

The development against Celsius Network came when Alabama, Texas, and New Jersey were also among US states that issued cryptocurrency leader BlockFi with similar actions in July.

During that time, the three US states mentioned that the cryptocurrency platform BlockFi may have violated securities law by providing its interest-bearing accounts within their jurisdictions.

The three states said BlockFi did not register its BlockFi Interest accounts with state regulators and stated that such products might be unregistered securities offerings.

BlockFi Interest Accounts allow customers to deposit their cryptos and earn interest, depending on how much and which kinds of assets are deposited.

On September 7, the US Securities and Exchange Commission warned that it would sue Coinbase if the exchange launched its new digital asset lending product. Coinbase plans to launch a yield product called Lend that allows customers to earn interest in certain digital assets on the platform. The SEC considers the Lend product as security.

Goldman Sachs Reportedly Raising Funds to Acquire Celsius Assets by $2 bn, Report says

American multinational investment bank Goldman Sachs Group Inc reportedly has shown interest in buying embattled crypto lender Celsius Network, Coindesk reported, citing two people familiar with the matter.

Goldman Sachs is notably gauging interests and soliciting commitments from several investors in the traditional financial ecosystem and Web3.0 space. With about $2 billion in capital investment, Goldman Sachs is looking forward to buying the firm at a huge discount. Following the past $400 million funding round Celsius conducted back in 2021, its valuation has placed at over $3 billion at the time, making it one of the few crypto lenders with a unicorn status.

Celsius came off as one of the companies severely hit by the cryptocurrency market meltdown of the past few weeks. The company halted its key operations, including withdrawals, citing the extreme market conditions as the cause. While Celsius showed off its challenges with the withdrawal halt, many industry stakeholders have posited that the platform might have become insolvent, sending more shivers down the broader ecosystem.

Celsius network has over $12 billion in Assets Under Management and over $8 billion in assets lent out to investors. With the notion of bankruptcy on the horizon, Celsius Network is also acting in a way that will heighten people’s suspicion.

The startup has tapped the services of Citigroup, Alvarez & Marsal, and restructuring attorneys from Akin Gump Strauss Hauer & Feld to help advise it on the best course of action following its platform’s operational halt.

One of the recommendations that have been given to the firm is that it should consider filing for bankruptcy. Should it trail this path eventually, more investors will be looking at taking over the firm through acquisition. One of these includes competing with a Swiss lender, Nexo, who has an active offer to acquire the company’s collateralized loan portfolio.

Celsius Had Higher Risk Profile Than Average US Bank: WSJ

A recent report from the Wall Street Journal (WSJ) has revealed that embattled crypto lending platform Celsius Network took on more risk than it could naturally handle.

A review of the data sent to investors when it last raised $400 million showed that the company, led by Alex Mashinsky, had a total asset base of $19 billion with its equity contribution pegged at just $1 billion.

From this figure, the WSJ made an analogy that showed Celsius Network’s Asset-to-Equity ratio was more than double the average for all the North American banks in the S&P 1500 Composite index, which is close to 9:1.

With this ratio known as one of the major markers of a highly risky portfolio, Celsius’s outlook was one of a large financial institution with access to the Federal Reserve’s bailout. The obvious unsustainability profile of the firm was pointed out with the halt of transactions earlier this month.

“It’s just a risky structure,” said University of Chicago economist Eric Budish of Celsius to the Wall Street Journal. “It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006,” referring to a feature of the 2008 financial crisis. “It was all housing — here it’s all crypto.“

While Celsius has informed its clients and creditors that it needed more time to figure out the best course of action to bounce back, the restructuring lawyers and Citigroup which the firm tapped to provide informed advice have recommended filing for Chapter 11 Bankruptcy, a move the firm is kicking against.

Unsure how Celsius is going to wriggle out of its current challenges, other similarly embattled players are already exploring viable options. BlockFi recently secured a $250 million credit facility from Sam Bankman-Fried’s FTX exchange, and Three Arrows Capital has been ordered to liquidate its assets by a British Virgin Island court.

FTX Abandoned Discussions to Celsius Network Acquisition – Report

The latest report on Thursday 30th June showed that Bahamian cryptocurrency exchange FTX Derivatives Exchange passed on a deal to acquire New Jersey-based crypto lending firm Celsius Network.

FTX had begun discussions with Celsius about bailing out the troubled company or acquiring the firm. However, after examining Celsius’ finances, the trading platform walked away and decided to abandon the negotiation talks.

FTX made the move after it assessed that Celsius’ balance sheet added up to a “$2 billion hole,” According to the report, FTX also found out Celsius’ situation is difficult to deal with.

In May last month, Celsius was reported to have $11.8 billion in assets, which is a huge decline from the $25 billion it had in October last year.

On 12th June, Celsius suspended all withdrawals, swaps, and transfers between accounts because of “extreme” market conditions that appeared to have hit the crypto industry.

In recent months, the market for digital assets has been shaken by extreme volatility as investors dump risky assets on fears that aggressive actions on interest rate hikes to taper down persistent inflation could plunge the economy into recession.

Earlier this month, Celsius contacted the law firm Akin Gump Strauss Hauer & Feld LLP to advise on possible solutions for its growing financial woes. The firm also hired consultants from the advisory firm Alvarez & Marsal to oversee its restructuring.

After facing a liquidity crisis for weeks, Celsius has been resisting guidance from its own lawyers to file for Chapter 11 bankruptcy.

Last Friday, reports indicated that Wall Street bank Goldman Sachs was seeking to raise $2 billion from investors to buy the distressed crypto lender.

The proposed deal would allow investors to purchase the firm at a potentially big discount if the crypto lender files for bankruptcy.

However, filing for bankruptcy is not the route that Celsius would prefer. Celsius executives believe most users would prefer the troubled cryptocurrency lending firm to continue operations and avoid the uphill task of bankruptcy.

Celsius Network Slashes 25% of its Workforce amid Potential Insolvency

Celsius Network’s woes continue to deepen because the crypto lending company has reduced its workforce by 150 employees, including those based in Israel, according to media outlet CTech.

The American-Israeli company let go a quarter of its workforce just a few weeks after it halted withdrawals, citing extreme market conditions, which resulted in rumours of insolvency.

Nevertheless, Celsius has hired restructuring lawyers and consultants to solve its financial woes. The firm noted:

“We are focused and working as quickly as we can to stabilize liquidity and operations, in order to be positioned to share more information with the community. We are operating with the entire community and all clients in mind as we work through these challenging times.”

Celsius raised $750 million in funding in late 2021, pushing its valuation to $3 billion.

Founded in 2017, the firm gave interest-bearing products to cryptocurrency owners who deposited their funds, with returns going as high as 18.6% annually. In turn, the firm would lend out cryptocurrencies to gain profits.

Did Celsius bite off more than it could chew?

A recent Wall Street Journal (WSJ) report disclosed that Celsius took more risk than it could handle because it had a total asset base of $19 billion. In contrast, its equity contribution was pegged at just $1 billion.

As a result, the WSJ made the analogy that the company’s Asset-to-Equity ratio was more than double the average for all the North American banks in the S&P 1500 Composite index, which is close to 9:1.

These factors might have contributed to crypto exchange FTX shelving its acquisition of the company. FTX recently revealed that it turned down bailing out the embattled crypto lending platform because its situation was difficult to solve.

Moreover, the crypto exchange poked a “$2 billion hole” in Celsius’ balance sheet.

Nexo Offers to Acquire Vauld Group after Celsius's Cold Treatment

Nexo’s plan to buy a cryptocurrency lender may be coming to fruition as the company has shown interest in acquiring Vauld Group.

This development comes after Vauld Group announced earlier this week that it has halted withdrawals and other operations on its platform in the wake of the ongoing onslaught in the digital currency ecosystem.

According to a report from The Block, Nexo has signed an indicative term sheet with Vauld with a plan to acquire up to 100% of the Singapore-based company. Without financial terms revealed, the company said it will review Vauld Group’s balance sheet over the next 60 days in order to ascertain how best to support the ailing company.

“We have to see what exactly is on their books and it’s going to take a little while,” Nexo co-founder Antoni Trenchev said in an interview. “But since we have the exclusive exploratory period, we are the only ones looking at them right now.”

As a crypto lending platform, Vauld Group said it became severely distressed when it witnessed massive withdrawals to the tune of $198 million following the collapse of Terraform Labs’ LUNA and UST digital currencies. As it was unable to handle the liquidity pressures, it had to suspend its core operations.

According to Trenchev, Nexo will examine all aspects of the company’s previous asset base including whether it has long-term staked coins or other investments.

“We have to view it in the overall context of if we step in, can we restructure the business so that it is functioning again, so that it is profitable within the Nexo umbrella, which as a company is profitable and whether we can accumulate that,” Trenchev said.

The consideration for Vauld Group is strategic for Nexo which wishes to expand its operations in India and other Asian markets where the former has active operations. The proposed acquisition of Vauld Group comes after Celsius Network gave Nexo a cold treatment when it offered to buy out its collateralized loan products last month.

Lawsuit: Ex-Employee Accuses Celsius Network of Financial Fraud Involvement

A former investment manager at Celsius Network filed a lawsuit against the popular crypto lending firm on Thursday, claiming that the firm involved itself in market manipulation and failed to create basic accounting controls to safeguard customer deposits.

Jason Stone, the CEO and founder of KeyFi, who was employed by Celsius, filed the matter to the court and used Twitter social media to disclose the fallout between the parties.

Stone revealed that Celsius used clients’ deposits to manipulate (rig) the price of its crypto token to earn extra cash. Stone further said Celsius failed to properly hedge risk, an incident that caused Celsius to lose massive funds when the extreme market rout came in. Celsius was forced to freeze customer assets.

Stone stated:

“We discovered Celsius had lied to us. They had not been hedging our activities, nor had they been hedging the fluctuations in crypto asset prices. The entire company’s portfolio had naked exposure to the market.”

Stone said Celsius ran a fraudulent investing scam (Ponzi scheme) to benefit itself through “gross mismanagement of customer deposits.” The complaint further disclosed that Celsius defrauded KeyFi Inc into offering services worth millions of dollars and refusing to pay for them.

Stone further revealed that Celsius struggled to pay investors because of its failure to hedge investments, which resulted in massive losses to the firm as the values of different coins saw extreme fluctuations.

Stone also accused Celsius of logging some deposits onto its cash accounts in U.S. dollar base currency even if the firm paid customers with Bitcoin or other tokens, an incident that caused a $100 million to $200 million holes that the firm could not fully explain or account.

The complaint said he worked largely without a written agreement with Celsius. And further revealed that KeyFi helped Celsius generate $838 million of profit before costs and overhead from August 2020 to March 2021, out of which KeyFi was entitled to get a 20% of net profit.

Stone further said he exited his relationship with Celsius in March 2021 after it became clear that the hedging concerns could financially ruin both Celsius and KeyFi’s reputations, but Celsius refused to acknowledge his resignation.

The lawsuit, which was filed in New York State in Manhattan on Thursday, seeks unspecified compensatory and punitive damages.

A Tragic Market Turbulence

Stone’s move is part of a series of developments that have come after Celsius decided to suspend withdrawals and transfers for its 1.7 million customers due to extreme market conditions.

On 12th June, Celsius suspended all customer withdrawals, swaps, and transfers between accounts. The lender said it made the decision to put it in a better position to honour over time, its withdrawal obligation amid the recent market volatility.

Celsius stopped paying out customer balances, trading, and transfers. The crypto lender cited “extreme market conditions” and that sparked investor concerns regarding the firm’s potential insolvency.

Celsius is one of the major players in the emerging crypto lending landscape. As of May, the firm had lent over $8 billion to customers and managed almost $12 billion in assets. According to its website, Celsius pays customers annual interest rates of up to 18%. The lender was just like a bank and gained wide prominence.

Major problems started in the recent market turbulence triggered by the collapse of TerraUSD stablecoin. Celsius and several other institutions deposited amounts in the hundreds of millions in the Terra algorithmic stablecoin “UST” and withdrew during the collapse. Although the exact amount of Celsius’ deposits into Terra stablecoin was unknown, a lack of adequate hedging and risk management could have led to massive losses to the lender.

EquitiesFirst Owes $439 Million In Debt to Celsius Network

EquitiesFirst, an Indianapolis-based specialist finance company best known for lending cash to institutions secured against their stock holdings, is identified as a debtor to the prominent crypto lender Celsius Network. That is according to Celsius’ bankruptcy filings, as reported by Financial Times media outlets.

On Thursday, Celsius CEO Alex Mashinsky stated in a court filing that his firm was owed $439 million by a “private lending platform,” which he did not mention. However, two individuals familiar with the knowledge disclosed that the platform is EquitiesFirst.

The court filing said the relationship between the two companies initially came from deals in which Celsius started borrowing from EquitiesFirst in 2019 on a secured basis to support its business operations.

The relationship expanded and later it turned out that EquitiesFirst owed Celsius amounts worth $509 million on an unsecured basis.

EquitiesFirst had slowly paid down the debt since September last year. Although the firm is steadily paying off the debt, there is still an outstanding loan worth $439 million — made up of 3,765 Bitcoins and $361 million in cash — which are yet to be paid.

“EquitiesFirst is in ongoing conversation with our client and both parties have agreed to extend our obligations,” EquitiesFirst told Financial Times media.

EquitiesFirst, which was founded in 2002, specializes in loans secured against company stock. The firm began lending against cryptocurrencies around 2016.

According to the report, EquitiesFirst’s lending in the crypto landscape was typically at a 60% loan-to-value, secured against cryptocurrencies like Bitcoin and Ether.

Efforts to Rescue Business

The funds owed by EquitiesFirst is a huge amount of Celsius’s assets, which hundreds of thousands of its clients will be relying on to recover some of their deposits.

The EquitiesFirst debt, which Celsius had not disclosed before, now provides context to the difficulties the crypto lender encounters as crypto markets plunged hard this year.

On 12th June, Celsius suspended all customer transactions and withdrawals across its networks, citing extreme market conditions.

On Wednesday this week, Celsius filed for bankruptcy protection as it seeks to stabilize its business by restructuring in a manner that maximizes value for all of its stakeholders. In the meantime, Celsius stated that it has $167 million in cash on hand to support operations.

ZipmexX Suspends Withdrawals, Citing Celsius and Babel Risk Exposure

Asia’s leading digital asset exchange ZipmexX has suspended users’ cryptocurrency withdrawals, citing the move as the exchange’s assets could be swallowed up by the financial crisis facing the Celsius Network and cryptocurrency lender Babel Finance.

The company revealed that it had lent $48 million to Babel Finance and $5 million to Celsius, which filed for bankruptcy protection. To resolve the liquidity crisis, the company is working with both companies and actively negotiating a potential bailout with investors.

On Thursday, Zipmex’s official statement reads:

“Our exposure to Celsius was minimal, as such, we were intending to write this off against our own balance sheet.”

Zipmex cited “volatile market conditions and the resulting financial difficulties for our key business partners” as the reason for its decision.

Founded in 2018 by Marcus Lim and Akalarp Yimwilai, Zipmex started operations in September 2019 and is headquartered in Singapore and Thailand.

The company’s native ZMT token has fallen more than 90% from its all-time high. The current price was trading at $0.3815, up over 15% during the intraday.

Previously, Babel Finance, a cryptocurrency lending firm based in Hong Kong, announced that it had temporarily paused the withdrawals and redemption of crypto assets. The move comes as the crypto lender appears struggling to pay its customers after the recent plunge in the cryptocurrency market.

On June 13, cryptocurrency lending platform Celsius Network suspended all withdrawals and transfers from customers as the company faced fears of insolvency and bankruptcy.

The co-founder of cryptocurrency data aggregator CoinGecko, Bobby Ong, said that: “Zipmex is part of the crypto contagion fallout, and the insolvency of their counterparty has caused Zipmex not to be able to honour its obligation to its depositors.”

Ripple Discloses Interest in Bankrupt Crypto Lender Celsius Network

Blockchain payments firm, Ripple Labs Inc, is reportedly interested in the bankrupt crypto lending platform Celsius Network.

As reported by Reuters, a company spokesperson gave insight into the company’s interest but failed to state in what capacity the payments unicorn hopes to show interest.

“We are interested in learning about Celsius and its assets and whether any could be relevant to our business,” the spokesperson said, a statement that is fueling speculation that Ripple may be considering a bailout stake.

The spokesperson affirmed that Ripple has been exploring avenues to grow strategically during this long-drawn crypto winter, and the firm “is actively looking for M&A opportunities to strategically scale the company,” the spokesperson said.

According to the Reuters report, Ripple has shown its interest by filing an application for it to be represented in the ongoing Celsius bankruptcy hearing. The application was granted earlier this week, a situation giving Ripple first-hand knowledge of the company’s current liabilities and how it may likely benefit in the event of a partnership or buyup.

Ripple is not entirely free of struggles as it has been in a long-drawn legal battle with the United States Securities and Exchange Commission (SEC) over the sales of XRP coins as security. While pundits have tipped Ripple to win the SEC in the long run, the case has largely slowed Ripple’s growth and business expansion in the United States over the past 2 years.

Celsius Network went bankrupt on the backdrop of a general collapse of the cryptocurrency ecosystem, a situation that has also impacted other crypto lenders, including Voyager Digital and BlockFi. Celsius, at the time when it halted withdrawals back in June, got an offer of acquisition from the more liquid lender, Nexo, however, the firm played mute and never responded to the proposal at the time.

Besides Ripple, other major outfits that have shown interest in Celsius Network include Goldman Sachs. None has made a formal offer to acquire the platform as of the time of this report.