Crypto *bank* Celsius Network files for Chapter 11 bankruptcy. As of July 13, 2022 it owed more than $4.7B of user deposits with only $4.3B of total assets and $5.5B of total liabilities. No, 3AC didn’t bankrupt them. Their claim to 3AC is only $40.6 millions according to the filing but they have a total of $1.2B shortfall. With the $800M+ venture funding, they somehow vaporized $2B in a couple of years. I found it quite atrocious that Celsius called itself a bank but has no loss reserves and no equity.
Celsius marketed itself as a tech forward banking platform that is revolutionizing the world of finance with a charismatic CEO, fancy web3 capabilities, $800M+ of venture funding, and most importantly high interest rates on user deposits. They claimed that their main business model is to loan crypto to institutions. Unlike big banks who mostly pocket the profits of lending themselves while paying users crumbs, Celsius shared 80% of the profits with users. When the crypto gravy train was chugging along, they seemed to be on top of the world. But nobody actually knew what happened to all the money they took from the users as they are not required to disclose what’s going on. They just shouted “Trust me!”. Shockingly, a good number of people actually did trust them and are being burned badly. People now realize why banking regulations exist. Charlatans take advantage of opportunities like this to enrich themselves and impoverish the public. Well, sometimes they don’t even enrich themselves. They just take excessive risk of the user deposits and lose it all. You can watch the video below to get a good glimpse on how Celsius got influencers to shill their platform. Knowing what we know now, their marketing is disgusting.
Unfortunately, I am actually guilty myself. I am a tiny equity investor of BlockFi. I invested in BlockFi in mid-2020 while they were growing like weeds. My thought was that I wouldn’t put money on BlockFi as a user because they are not FDIC insured. However, if the company could keep growing, investing in BlockFi equity would be a good leveraged bet. BlockFi’s marketing is less aggressive than Celsius but it’s basically the same thing. My investment is set to be wiped out. But money aside, I regretted participating in the deal. I do think BlockFi has better intentions but I don’t believe their business model would work once the platform is subject to necessary regulations.
Finally, I believe Crypto CeFi is worse than both DeFi and TradFi. On DeFi, at least all the data is out in the open on the blockchain. It’s super transparent. You can inspect the blockchain data to determine if the risk is worth it. People have been pointing out Terra/Luna’s vulnerabilities months before its collapse. People could see the problem because Anchor protocol’s enormous UST balance is shown prominently on the website. On DeFi lending platforms like Aave or Compound, you know exactly how much liquidity is out there, which wallet is at risk of getting liquidated and how the borrowing/lending rates are calculated. All the data is there and the assumption is that users take full responsibility when they interact with these DeFi platforms. In TradFi (aka regulated banks), banks have to spend considerable effort to manage risks, meet capital adequacy requirements and report their data to regulators on a regular basis. With that, our deposit in banks is FDIC-insured up to $250K. Unregulated crypto CeFi lacks both transparency and regulatory oversight. People should not be surprised why they blew up. It’s actually better they blow up before they get too big.