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Bankchain Briefing: What can we learn from the Celsius withdrawal freeze?

  • This week, we try to make sense of the Celsius withdrawal freeze and discuss its implications for investors and the wider industry.
  • We also hear from Zero Hash co-founder Edward Woodford on the convergence of DeFi and TradFi.
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Bankchain Briefing: What can we learn from the Celsius withdrawal freeze?

The crypto winter keeps getting harsher. Just a month after the Terra stablecoin de-peg sent shock waves throughout the industry, a new crisis has been causing panic in the world of digital assets and keeping investors up at night.

On Sunday, June 12, blockchain-based lending platform Celsius Network announced that it would freeze all withdrawals and transfers of digital assets on its platform due to “extreme market conditions”.

Celsius is one of the biggest players in the crypto lending space, with over $8 billion lent out to clients and nearly $12 billion in assets under management as of last month.

“We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets,” the company wrote in a memo to its clients. “We understand that this news is difficult, but we believe that our decision to pause withdrawals and transfers between accounts is the most responsible action we can take to protect our community.”

The news triggered a steep decline in crypto prices, with the global crypto market cap dropping below $1 trillion for the first time since January 2021. The company’s native CEL token took a nosedive, dropping 70% within a day, from a high of $0.49 down to $0.15. Bitcoin hit an 18-month low of under $23000, while Ether dropped nearly 20% to below $1200.

Ironically, just a day before Celsius made the announcement, CEO Alex Mashinsky appeared to lash out on Twitter at a crypto investor raising concerns about a possible freeze on withdrawals.

“Mike, do you know even one person who has a problem withdrawing from Celsius?”, tweeted Mashinsky. “Why spread FUD and misinformation. If you are paid for this then let everyone know you are picking sides. Otherwise, our job is to fight TradFi together…”

The Celsius episode is the latest blow to an already fragile crypto market on account of rising interest rates, record inflation levels, and a looming recession.

But what does this event really mean for investors and institutions? What can they learn from it, and how should they navigate these complex market conditions?

I asked two crypto experts to share their takeaways on this topic, and they both seem to have similar views on the implications of this event for investors, as well as its overall impact on the industry.

Frank Corva, senior crypto and blockchain analyst at Finder:

Following the announcement by Celsius about halting digital asset withdrawals on its platform, Celsius users went into a panic, as they quickly learned the meaning of the phrase, “not your keys, not your crypto.”

To truly own your digital assets, you must own the private keys to them. The private keys to your digital assets are like the password for them that gives you access to the virtual safety deposit box on the blockchain where they are kept.

When you use a centralized crypto lending service like Celsius, or even just leave your crypto on an exchange, you temporarily forfeit your access to your assets. And if a centralized service like Celsius goes under, you permanently forfeit your access to those assets, as the company will likely use the assets on its balance sheet to pay down debts in the event of bankruptcy.

Most newcomers to the world of crypto don’t understand this private key dynamic. They think of crypto assets much like they think of stocks, which are essentially just IOUs. What they don’t realize is that digital assets only become IOUs when you leave them in the custody of a company like Celsius or an exchange like Binance (which also temporarily halted bitcoin withdrawals on June 13).

No one seems to know exactly what is happening behind the scenes with Celsius, so it’s difficult to say whether the company will go under or not. Some have speculated that Celsius was recklessly investing the assets that clients lent to it. Others seem to think that Celsius had far more exposure to Terra (LUNA) and TerraUSD (UST) than it led on.

Whatever the actual reasons are, we don’t know for sure yet. But we do know that it seems almost impossible that Celsius will recover its clients’ trust, which is usually a death sentence for crypto companies.

With these types of market-tanking events in crypto, there is always a lesson to be learned. The lesson here is that your crypto is not really yours unless you hold the private keys to it. Crypto lending companies have only existed for a few years now, and because so little regulation exists around them, investors should be wary of forfeiting the rights to their digital assets to companies like Celsius, even if they offer a good rate of return on them.

Sam Callahan, Bitcoin analyst at Swan Bitcoin:

Celsius and Binance freezing user withdrawals during this period of heightened market volatility serves as another example of “not your keys, not your bitcoin.” Individuals who have funds with these parties are exposed to counterparty risks that don’t exist if they take self-custody of their bitcoin. Users risk losing access to their funds when they don’t hold their private keys, and the recent events at Celsius and Binance highlight this fact.

It’s vital for individual investors to understand the risks involved when holding their crypto on these centralized platforms. Unfortunately, in the case of Celsius, many individual investors will learn this lesson the hard way. Celsius is rumored to be close to insolvency, and if they do end up going bankrupt, user funds will be tied up in bankruptcy courts for the foreseeable future, and they are unlikely to be refunded in full.

But as an industry, Bitcoin fundamentals remain unchanged despite these recent events. Celsius was just a single centralized service provider that poorly managed its risk and made questionable decisions around the allocation of its users’ funds. Bitcoin remains the only working decentralized monetary protocol in existence today, and is functioning just as intended with 99.9% uptime despite the blow-ups of overleveraged lending platforms like Celsius. I expect Bitcoin’s popularity to continue to grow throughout the world as more and more investors appreciate the fact that it is money that can’t be inflated, seized, or censored. Ultimately, the Celsius debacle currently unfolding will merely become a blip on Bitcoin’s path towards mass adoption.

'Every financial firm will become a crypto firm': Zero Hash co-founder Edward Woodford on the convergence of DeFi and TradFi

When Edward Woodford co-founded Zero Hash back in 2017, the crypto industry was fundamentally different than it is today. Speaking at Tearsheet’s inaugural Bankchain Conference, he reflected on how the crypto landscape has evolved since then — how DeFi is starting to converge with TradFi, how consumer behavior is changing, and what role firms like Zero Hash are playing to facilitate these shifts.

Woodford says crypto adoption has now reached a level where every financial services firm is looking closely at digital assets, if it’s not already offering them to its customers in some form. He predicts that within the next few years, every financial firm will become a crypto firm, from BNPL providers to wealth management firms.

But what’s equally important is that every crypto company is also starting to offer traditional financial services in some capacity. That means it’s no longer enough for financial firms to simply offer crypto products like buying, selling, and rewards to their customers – they need to offer sophisticated, high-quality crypto services in order to match up with their DeFi counterparts.

“If you look at a firm like FTX, they’ve made very clear their desire to offer the services of a traditional brokerage firm,” said Woodford. “And so, that means traditional financial players getting into digital assets need to offer quality crypto products, because if FTX or Coinbase or Gemini is going to offer traditional financial services, they need to match them and have some equivalency for their crypto products as well.”

Reflecting on the changing expectations and behaviors of consumers, Woodford points out two important shifts that he believes will encourage much greater crypto adoption going forward.

First, he says market volatility and sudden shifts in crypto prices don’t seem to impact consumer demand as much as they used to, which suggests that the space is maturing, and consumers now have more confidence in the long-term growth of the industry.

“One positive shift that’s taken place over the years is that this conversation about crypto adoption has become somewhat decoupled from price,” he said. “I think that’s an important feature – and the overall perception of crypto has also adjusted pretty quickly.”

Another shift emphasized by Woodford is that the common perception that digital assets are primarily owned by “Millennial males” is no longer valid, as the industry is becoming more inclusive, with crypto reaching a much wider demographic of end consumers.

“If you look at the statistics, about 18% to 20% of American adults have purchased digital assets as part of their portfolio. That means four out of five adults still haven’t purchased crypto – and I think the way they will do so is through banks, neobanks, brokerage firms, and wealth management apps that they already have accounts in,” he said.

“I truly believe that over the next 12 to 18 months, whether through Zero Hash or one of our competitors, every American will be able to purchase digital assets through an account that they already have open today. And I think that’s a really, really critical part in the adoption cycle.”

Highlights from our recent coverage

“Digital assets are effectively cybersecurity problems”: Anchorage Digital on the institutional adoption of crypto assets

As the institutional adoption of digital assets grows, so does the opportunity for companies to offer safe storage and transactions. Tearsheet spoke with Diogo Monica, co-founder and president of Anchorage Digital, about the complexities of digital asset custody in the crypto era.

Advocating for digital assets is growing as new regulation looms large

Global Digital Finance, the biggest digital assets and blockchain association in the world, engages regulators and policymakers to promote digital finance. While crypto will be more regulated, the industry is nervous about a lack of consideration for its unique position relative to traditional finance.

Bankchain Conference 2022: All session videos

Tearsheet’s inaugural Bankchain Conference explored the strategies different FIs are employing when it comes to tackling crypto, from trading to stablecoins to custody. Hear from the leading blockchain firms working with FIs – like Paxos, Ripple, Anchorage Digital, Zero Hash, and more.

What we're reading

  • 'Enormous outflows' from largest Bitcoin ETF may have triggered BTC crash (CoinDesk)
  • MoneyGram launches crypto-to-cash service (Finovate)
  • Elon Musk sees Twitter as a crypto payments platform (CoinDesk)
  • American Express announces first crypto rewards credit card on its network (Forbes)
  • JPMorgan wants to bring trillions of dollars of tokenized assets to DeFi (CoinDesk)
  • Coinbase extends hiring freeze, rescinds job offers (Finextra)
  • Crypto.com, BlockFi to cut over 400 jobs amid market rout (CoinDesk)
  • Gemini lays off 10% of its workforce as the ‘crypto revolution’ enters its ‘contraction phase’ (TechCrunch)
  • PayPal lets users withdraw their crypto holdings to their own wallets (CoinDesk)
  • How CBDCs could help banks reinvent payments and retail banking (Tom Noyes)

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