The bankruptcy filing of major cryptocurrency lender Celsius Network in New York on Wednesday has been called a “Lehman Brothers moment” in crypto.
The demise of the US investment bank in September 2008 was the trigger for the global financial crisis which required massive US government and Federal Reserve intervention, as well as international action, to prevent a complete collapse.
The company had liabilities of $5.5 billion, mostly to Celsius users, and assets of $4.3 billion.
While the crypto market crash is not on the scale of the 2008 crisis, nor is it an isolated event without broader financial significance.
Indeed, while the crypto market has rightly been seen as something of a Ponzi scheme, the collapse of Celsius and other crypto companies is the result of Fed tightening monetary policies affecting all areas of the financial system.
In order to entice depositors, Celsius offered high rates of return on their money which he then lent to other crypto companies, using rhetoric from across the crypto world to portray himself as some sort of rebellion against the banking system.
In 2020, as the crypto boom took off, Celsius CEO Alex Mashinsky posted video addresses in which he railed against the rigged financial system and greedy bankers, claiming to offer an alternative.
In a major article this week, the FinancialTimes (FT) recalled remarks he made during an interview last year. “There is a continuous compression of the 99% by the 1% to extract more profit,” he said. In a 2020 interview, he claimed Celsius was “actually safer than most banks.”
The bankruptcy filing told a very different story.
A press release from Celsius’s board said the bankruptcy followed last month’s difficult but necessary decision to halt withdrawals, exchanges and transfers to stabilize its business and protect its customers.
If he hadn’t, there would have been a run on deposits and the customers who came in first would have been paid in full, leaving the others with illiquid and uncertain claims. In other words, Celsius would have been subjected to what amounted to a bank run.
Crypto proponents have claimed that it is a new system that does not depend on central banks. But the history of this market shows that it has been heavily dependent on the outflow of trillions of dollars into the financial system by the Fed and other central banks. The supply of ultra-cheap money has been driving the crypto boom in 2020 and 2021, such that the market value of crypto assets reached $3 trillion in November last year.
Since then, the Fed’s monetary policy tightening in response to rising inflation has seen the crypto’s market value fall by around two-thirds, with bitcoin’s value falling by 70%.
Signs of an emerging crisis appeared earlier this year when a so-called TerraUSD stablecoin that was supposed to be pegged 1-to-1 to the US dollar fell below parity, accompanied by the collapse of the sister token. Luna.
Then came the collapse of Singapore-based crypto hedge fund Three Arrows Capital, which suffered significant losses due to its exposure to Terra and Luna. Another crypto firm, Voyager Capital, has also filed for bankruptcy.
Since Terra’s implosion in May, according to the FT, “at least a dozen hedge funds, exchanges and lenders such as Celsius have collapsed, blocking customer withdrawals, raising funds at cut-off prices or s ‘collapsed into bankruptcy’.
In its analysis of Celsius’ demise, the FT noted that it relied on “a stream of deposits from retail investors which it lent to big crypto companies and used for risky bets on corporates. untested”. But last year, as demand for loans from institutional investors waned, it began to take greater risks.
Retail investors were attracted by the promise of rates of return of up to 18%. But the best return was provided only to those who agreed to receive their payments in the form of the company’s CEL token.
According to the FT report, even as the value of the CEL token fell from the 2021 high of $8 to the $1 level today, the company was urging investors to hold their investments and not sell.
But while those statements were being released, internal company documents reveal Daniel Leon, one of Celsius’ co-founders, and others “had already sold millions of dollars of their own CEL holdings to the company. ‘company”.
Last December, as the crypto slide began, Mashinsky tweeted that all founders of Celsius Network had purchased CEL and were not sellers of the token.
But cryptanalytic firm Arkham Intelligence estimated that he sold $44 million worth of CEL tokens through exchanges. So much for the company’s claims in its bankruptcy filing that its actions were to protect customers.
The FT report cited an internal company document produced in February last year warning that employees could transfer assets from one fund to another in order to hide losses and hide the true value of assets under management ( AT M).
“The company can inflate its representations of AUM and drive up the stock price/token price by using false financial information,” he said.
The amounts involved were not small. According to a former trader: “We click with billions of dollars like any small trader would with 10 dollars.
In 2011, in its report on the crash of 2008, a subcommittee of the United States Senate concluded, in the words of its chairman Carl Levin, based on the work of the investigators, on a “pit of financial snake in the throes of greed, conflicts of interest and wrongdoing”. .”
The significance of the ongoing revelations about crypto market operations is not only that nothing has changed, but that it has certainly gotten worse over the ensuing decade, being given the new massive amounts of money pumped into the financial markets by the Fed being used to fund speculation.
Even though attempts can be made to characterize the crypto market as some kind of outlier, its rise and rise has been made possible by the same conditions.—the supply of ultra cheap money—which produced a boom in the stock market and all other financial assets.
Although the crypto crisis may not be a “Lehman moment” for the broader financial market—at least not yet—he can certainly be characterized as a “canary in the coal mine”.