Cryptocurrency lender Celsius Network promoted itself as better than a bank, but now it’s filed for bankruptcy. WSJ’s Alexander Gladstone discusses the company’s promise, fall, and what it could mean for regulation in the cryptocurrency marketplace.
Further Reading:
– Celsius Customers Are Losing Hope for Their Locked-Up Crypto
– Behind the Celsius Sales Pitch Was a Crypto Firm Built on Risk
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Ryan Knutson: In 2017, a man named Alex Mashinsky founded a bank. It was a new kind of bank designed specifically for cryptocurrencies. He called it Celsius. Here he is a few years ago talking about what is new bank would do.
Alex Mashinsky: It reinvents what a bank is. It reinvents what a custodian is. It reinvents who you trust for your money, how you transact with other. It eliminates all the middlemen's from a bank-
Ryan Knutson: At one point he even said Celsius was safer than a traditional bank. He often wore shirts that said, banks are not your friends.
Alex Mashinsky: Our slogan is unbank yourself. It completely eliminates the need for a bank as an intermediary.
Ryan Knutson: Celsius allowed its customers to take out cheap loans and park their crypto in high interest savings accounts, and the company took off. In just a few years, Celsius collected about $25 billion in crypto assets. But over the past few months, Celsius has started to collapse. Now, the company has around just $4 billion in assets. In July Celsius has filed for bankruptcy and the company has frozen roughly half a million accounts, leaving customers with no way to access their crypto. Our colleague Alexander Gladstone has been covering it and he says, it raises big questions about what's going to happen to all that money.
Alexander Gladstone: What we're entering now is this uncharted territory where there aren't established laws and regulations that will determine how to resolve these very complex issues and huge amounts of investor losses.
Ryan Knutson: Welcome to The Journal, our show about money, business and power. I'm Ryan Knutson. It's Tuesday, July 26th. Coming up on the show, how Celsius went from claiming to be better than a bank to bankrupt. Celsius Network, which is based in New Jersey, was trying to be the crypto version of a normal bank. Instead of depositing dollars, people would deposit their crypto.
Alexander Gladstone: Celsius is essentially a unregulated cryptocurrency bank where the value proposition is you as a person, as an investor, you have some cryptocurrency assets, whether it's some Bitcoin or Dogecoin or Ethereum or whatever, put it into our accounts and we will give you up to 17% annual return.
Ryan Knutson: And that's a lot of interest. I mean, most checking accounts, well maybe if you're lucky give you 1% interest and Celsius was offering 17% or more.
Alexander Gladstone: 17 or 18%, it's a massive interest rate. And it's very, very unusual to have such a high interest rate. And so for a person who owns crypto assets, it was very attractive that you put it into these accounts and you get this very juicy return.
Ryan Knutson: Was anybody skeptical about this idea? Because when I hear give us your money and we can give you a 17% return, that just sounds impossible based on everything I've ever learned about the world of finance.
Alexander Gladstone: I totally agree. And I think that most people would say that anyone who's offering you such an above market return, there must be something fishy or suspicious about what's going on and it might not be that reliable, but this was within the context of the cryptocurrency industry, which had seen such incredible growth and so many fortunes that were minted from people who invested early into Bitcoin and all sorts of other things that these possibilities didn't seem that far fetched in a certain way where it's like, hey there's people who are Bitcoin billionaires. Some 17 year old kid who started buying Bitcoin out of his mom's bedroom and he's a billionaire now. Anything can happen. So 17% for giving this deposit doesn't seem that crazy to me.
Ryan Knutson: Celsius says it was able to deliver these high returns because of the way it invested customer deposits. It said it could take customer deposits and lend it out to other institutions for even higher returns. The other reason Celsius said it was able to do it was because it simply shared more of its profits with customers than traditional banks do. In interviews, Mashinsky often said regular banks were just being stingy.
Alex Mashinsky: The banks are doing a very good job for themselves and for their shareholders. Here, we're doing a very good job for the depositors.
Ryan Knutson: Celsius didn't just take deposits and pay interest though. It also gave out loans like to people like John Baselitz, he's a real estate agent in Philadelphia. In March of this year, he took out a loan worth $125,000 from Celsius at a 1% interest rate. In order to get the loan he had to give Celsius some of his Bitcoin and Ethereum as collateral. And what was attractive to you about that arrangement with Celsius?
John Baselitz: It was just very easy access to funds. I mean, I had the collateral. I think from the moment I requested it to when I received the funds was four hours or something. If you were to take out this loan in US dollars, they would wire it into your account, that would take a few business days. Then to get those funds from your bank account back onto a crypto exchange would be another seven day business day processing hold. So the whole reason people are into crypto is kind of just the ease of access.
Ryan Knutson: Why not just use a regular bank or some other institution to take out a loan like this?
John Baselitz: I mean, they don't have the infrastructure in place and I'm sure the interest rate would be higher than 1% on that. So, ultimately I think Celsius, they were acting as a bank but they're not regulated like a bank.
Ryan Knutson: You gave quite a bit of your money to this company, Celsius, did you have any concerns about them at all at the time?
John Baselitz: Yeah, I did. I mean, it's a private company so you don't have access to their financials and you kind of have to use heuristics, you dig around, you dig around on crypto Twitter, you go through the Reddit threads. I mean you try to make the best decisions you can with the information you have available.
Ryan Knutson: Celsius was able to win over a lot of people like John. At one point, it had more than a million customers.
Alexander Gladstone: They grew very, very fast. Mashinsky himself said the amount of digital assets on the company's platform grew faster than the company was prepared to deploy. So it was growing so fast that they didn't even know what to do with it.
Ryan Knutson: But there was a hidden weakness.
Alexander Gladstone: The model really depended on cryptocurrencies, rising in value to some extent. Because it becomes sort of a house of cards when things start going down. What happens is when things start going down, that's when people start withdrawing money and then that's what can really cause things to spiral.
Ryan Knutson: That's spiral, when we come back. Celsius began to find itself in trouble when the cryptocurrency market started tumbling earlier this year.
Speaker 5: It's a black bath across global crypto markets.
Speaker 6: Crypto's all for one ethos was its biggest draw. Now panic is spreading across the universe.
Speaker 7: Institutional investors are fleeing cryptocurrency.
Alexander Gladstone: There's a number of factors. The markets, other asset classes were also declining in value too and there were sort of a general risk off sense in the markets.
Ryan Knutson: The following price of crypto created a general sense of panic.
Alexander Gladstone: It sort of shattered the sense that everything was going to be okay. And it sort of made people realize whoa, even things that we thought were relatively stable and had been growing for a long time, these things can collapse very rapidly and cause huge, billions of dollars of losses, very, very quickly. So that just rattled the markets and made people start to think, oh my God, maybe we should withdraw our money from this.
Ryan Knutson: John, the real estate broker in Philadelphia was one of those people. He started looking into getting his money out of Celsius.
John Baselitz: I started getting a little bit worried. I decided to just close out my loans, pull out my collateral and get my assets off the platform or at least attempt to.
Ryan Knutson: In mid-June John says he paid back his loan and tried to get his original collateral back. Celsius sent some of the money, but not the final $172,000 worth of Bitcoin that he was owed. His customer portal just said the transaction was pending and at that point Celsius hadn't said much about what was going on.
John Baselitz: That point there was definitely butterflies in my stomach because at that time if you were active on Twitter, you would've seen the hundreds, if not thousands of posts basically talking about potential Celsius insolvency. So at that time, sure, there's a lot of anxiety going on. Yeah, it makes you wonder what's going on.
Ryan Knutson: Part of what was going on was that too many customers were trying to pull their money out of Celsius all at once.
Alexander Gladstone: They began increasingly withdrawing their money from their Celsius accounts. They call it a run on the bank. When you're a bank and you have all these deposits, but then you lend a lot of money out. When people start asking for their money back, you can see how things can get very-
Ryan Knutson: Yeah, because you don't have it.
Alexander Gladstone: You don't have it. So, that's why on June 12th Celsius froze the accounts and they're frozen to this day.
Ryan Knutson: One of the reasons Celsius wasn't able to give customers back their money is because so much of it had been invested in risky bets that were difficult to get out of.
Alexander Gladstone: They filed for bankruptcy roughly a month later. And that's where we're now in a whole new realm. It gives them certain protections where it gives them now time to figure out what they're going to do from here. And it's now official that they are not going to be honoring any withdrawal requests for the foreseeable future.
Ryan Knutson: Celsius said in a blog post that if it didn't freeze customer accounts, then the only people who would've been able to withdraw their money, would've been the people who acted first. The company also said that a lot of companies they've gone through bankruptcy and emerged stronger afterward. But for people like John, it means it could be awhile before he gets his crypto back, if at all.
John Baselitz: I think I'm a pretty level headed guy and I don't think for me it's not helpful to kind of dwell on the woe is me, everything's going to be ruined. You just have to kind of take a logical level headed approach and day by day, wait to see what new information comes out. And if I had every dollar I own on the platform, I would certainly be feeling differently. But, I've diversified myself to an extent where this is a painful wound but it's not fatal by any stretch. But at the same time would I like to have those assets in my possession? Absolutely.
Ryan Knutson: The collapse of a cryptocurrency bank is very different from the collapse of a traditional bank or stock brokerage account. Banks and brokerages are highly regulated, cryptocurrency isn't.
Alexander Gladstone: So put it this way. Let's say that you have some stocks in a stock brokerage account. Let's say for some reason that brokerage goes under, it files for bankruptcy. The current legal framework for securities brokerages is those assets, the stocks and bonds or whatever that you own, they are yours and they are segregated, separated from the assets and the balance sheet of the brokerage itself. That's codified into law. So even if that brokerage fails, your assets are still separate.
Ryan Knutson: So if that brokerage owes money to anybody else, they can't use my stocks to pay those other people back?
Alexander Gladstone: Yeah. You own it. It's yours. It's your account. It just happens to be that the brokerage, which it's parked in happens to have failed. But it's not mingled with their balance sheet. That creates a powerful legal protection for you and this is a reflection of the fact that the securities industry is a fairly mature industry. Stocks and bonds, this has been around for a long time and there's a lot of laws to establish how various claims are treated. Those laws do not apply to cryptocurrency and in fact, we're in a situation where the cryptocurrency industry has grown so fast and become so big over the past decade, that it's grown way faster than the regulators and lawmakers have been able to keep up with. So there aren't laws for this. We're in uncharted territories.
Ryan Knutson: Lawmakers are looking for ways to regulate the cryptocurrency industry, but any new laws are a long way off. Are there any lessons here for regulators, for other people in the cryptocurrency industry or even cryptocurrency investors?
Alexander Gladstone: I would say it used to be that you would think about it as you're investing in the cryptocurrency. But now when you see that there's actual risk of the platforms failing, you have to think about it like you're actually investing in the platform and you need to think about, is this a platform that could shut down tomorrow and leave my account frozen or is this one that is, I believe, is a solvent well functioning entity that is going to be a business for many years to come. It really makes you have to think about that. You aren't just investing in the coin, you're investing in the platform too.
Ryan Knutson: That's all for today, Tuesday, July 26th. The Journal is a co-production of Gimlet and the Wall Street Journal. Additional reporting in this episode by Vicky Ge Huang. Thanks for listening. See you tomorrow.
Kate Linebaugh is the co-host of The Journal. She has worked at The Wall Street Journal for 15 years, most recently as the deputy U.S. news coverage chief. Kate started at the Journal in Hong Kong, stopping in Detroit and coming to New York in 2011. As a reporter, she covered everything from post-9/11 Afghanistan to the 2004 Asian tsunami, from Toyota’s sudden acceleration recall to General Electric. She holds a bachelor degree from the University of Michigan in Ann Arbor and went back to campus in 2007 for a Knight-Wallace fellowship.
Ryan Knutson is the co-host of The Journal. Previously, he spent more than four years in the newsroom covering the wireless industry, and was responsible for a string of scoops including Verizon’s $130 billion buyout of Vodafone’s stake in their joint venture, Sprint and T-Mobile’s never ending courtship and a hack of the 911 emergency system that spread virally on Twitter. He was also a regular author of A-heds, including one about millennials discovering TV antennas. Previously, he reported for ProPublica, PBS Frontline and OPB, the NPR affiliate station in Portland, Ore. He grew up in Beaverton, Ore. and graduated from the University of Oregon.
