Barron's: Crypto Winter, Crypto Hell?

When a traditional bank fails, a SWAT team of regulators swoops in, winding it down in secret and preventing a panic that could spread throughout the financial system. In cryptocurrency banking, the demise happens in full public view—and there is no regulatory SWAT team to keep the markets calm.

That story unfolded this past week as Celsius Network, a major crypto lender that had more than $11 billion in deposits, froze withdrawals. “Celsius has billions in liquidity,” CEO Alex Mashinsky said publicly on Friday, June 10.

Less than 72 hours later, Celsius halted all withdrawals, swaps, and transfers between accounts. No investors have been able to get their money out since then. And there is nothing like the Federal Deposit Insurance Corp. in crypto to repay depositors in an insolvency scenario.

Celsius markets itself as an alternative to a bank, offering stupendously high yields on deposits with a pitch to “unbank yourself.” The company, through its Earn accounts, advertises yields of up to 18.6%, paid either in the crypto that’s deposited or in its native token, called CEL. It even offers 9.3% yields on stablecoins like USD Coin and Tether, tokens designed to maintain a fixed peg to $1.

Yet Celsius’ Earn product is no longer available to new retail U.S. investors, following a crackdown on high-yield crypto by the SEC in February. Rival BlockFi also halted its interest-paying product to new U.S. retail investors, under regulatory pressure.

In reality, Celsius bears scant resemblance to a highly regulated bank. The company takes deposits and farms them out to decentralized-finance, or DeFi, platforms and other entities, providing capital for investors to make bets on crypto, among other uses. The company earns a high yield on those activities, paying a portion of the interest back to its depositors.

Still talking about Celsius

Its disclosures state that the business isn’t registered under securities laws, offers no FDIC insurance, and may relend the same assets multiple times. Moreover, deposits aren’t custodied by Celsius and “may be subject to total loss,” the company warns, if an event occurs on a DeFi protocol that is outside of its control.