Crypto lending firm Celsius saw over 2,000% growth in deposits, but concerns surround where deposits go

Quick Take

  • Cryptocurrency lending firm Celsius Network has seen 2,165% growth in deposits since it opened its business last year, but there are concerns surrounding how interest is generated from these deposits
  • Celsius states that it lends to hedge funds, institutional traders, and exchanges to earn interest, however, the firm does not make clear that it also lends to margin traders through margin trading programs run by some exchanges
  • One of these exchanges is Bitfinex, which is entangled in a series of legal disputes recently; lending to margin traders on Bitfinex gives the exchange full control over risk management of the loans and may expose Celsius to regulatory and operational risk

Celsius Network, a cryptocurrency lending company, has seen 2,165% growth in deposits over the past year, although the mechanism that allows these deposits to generate interest is clouded by uncertainties.

According to Celsius CEO Alex Mashinsky, the firm has processed over 160,000 lending transactions and accumulated around $345 million assets under management since it opened its business a year ago. A separate statement from Celsius' custody partner BitGo also notes that the company has transacted more than $1.5 billion over the past year. 

How deposits generate interest

As auspicious as the growth is, there might be issues surrounding the company’s interest generation mechanism and its risk disclosure to users. The company states on its website that Celsius lends the deposits to hedge funds, institutional traders, and exchanges to generate interest. This means that some of the deposits would go to institutions who can put down 50% to 150% collateral based on their balance sheets, according to Mashinsky. 

However, what has not been made clear to Celsius' users is that “lending to exchanges” also implies that Celsius lends directly to customers on some exchanges through their peer to peer margin trading program, as confirmed by Mashinsky to The Block. In this case, the exchanges determine how much collateral they take from margin traders, and the loans these exchanges issue to traders are provided by individual exchange users or institutional lenders like Celsius. In this way, margin traders’ default risks are solely covered by exchanges. However, it also means that if anything happens to the exchanges themselves, lenders, including Celsius, may face default risks as well. 

“When you are lending on this peer to peer margin lending exchanges, you are relying on these exchanges’ risk management, and if something ever goes wrong you are relying on the exchange to decide how it will be handled,” a market observer told The Block.  

Ties with Bitfinex

Among the exchanges Celsius works with that offers margin trading is Bitfinex, which is said to maintain good credit with its $378 million in profit last year and the newly raised $1 billion in token sales, according to Mashinsky. However, as its legal dispute with the New York Attorney General (NYAG) deepened, there may still be other risks involved in lending to Bitfinex. 

“The risk you are taking [with Bitfinex] is an operational and regulatory risk. I don't think it's a scam or fraud, they just don't have reliable banking. There is also obviously regulatory risk with the NYDFS investigation. It’s not uncommon, but there are certainly better options available,” said the market observer. 

To be sure, Bitfinex’s margin trading business has not yet seen any known losses so far. However, there are precedents where large-scale liquidation resulted in large-scale losses for lenders. In one such incident, cryptocurrency exchange Poloniex experienced $13 million in losses due to the price crash of CLAM tokens and it “socialized” these losses among its margin lenders by taking 16.2% from the principal of all currently active BTC loans. 

Celsius appeals to lenders by promising up to ~10.53% interest on their loans. According to Mashinsky, the company works with over 150 institutions to lend and borrow loans, although he declined to disclose the respective identity of these institutions due to competitive reasons. However, Mashinsky confirmed that Celsius currently does not lend any BTC on Bitfinex as the annual interest rate is only 0.3%, a rate not as attractive as lending to hedge funds and other institutional traders.  

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