In the American-British reality TV dating game show Too Hot To Handle, groups of determined singles were brought together on sunny paradise islands. For four weeks, they saunter their hot bods and go at one another, while trying not to give in to the temptation of the flesh. They stand a chance to win US$100,000 ($139,000) — only if they remain celibate.
Critics tripped over one another to pan the show, for good reasons. The show lasted three seasons before it eventually petered out. Nevertheless, the show managed to debut as the top programme on Netflix for the week of April 20.
This week, “the second crypto winter” described in this column (“Winter has come”, Feb 7) has taken a frostier turn. After the collapse of Do Kwan’s Terra Luna (described in “Dark side of the moon” in this column on May 18), crypto markets stabilised, albeit all too briefly. The next downdraft was unleashed when Celsius, a crypto lending platform in the US, paused withdrawals on June 12.
Shortly after the announcement, CEL — the native token for that platform — fell by 70% in an hour, and by June 13, it lost another 40%. The more conventional Bitcoin fell precipitously close to US$20,000 — below its Luna-shock US$26,000 level. Other obscure coins fared even worse. Total crypto assets just over half a year ago were at US$3 trillion. The Luna shock purportedly took out US$1 trillion in early May alone. Assets are now worth less than US$1 trillion following the freezing of Celsius; even if its assets at the point of the pause were reportedly around US$12 billion, this was less than half the US$26 billion peak last year. Bitcoin, while a far cry from its double top at US$66,000–US$69,000 on the charts, is amazingly still only back to 4Q2020 levels.
Alongside this, the S&P and Nasdaq’s dead cat bounce late May into early June faltered, with the Nasdaq falling below 11,000 points on June 13 and the S&P down a whopping 3.88% on the same day after breaching the 4,000-point handle the Friday before.
With inflation’s ugly head still rearing — it hit 8.6% y-o-y in May, its highest level since December 1981 — the US Federal Reserve will focus on dealing with this familiar foe and view the whims of markets participants as secondary. As coined in this column, “rotation to reality” has seen the pull of gravity weigh down fluff, continuing to drag down even the once-invincible Elon Musk, with his Tesla at half its peak stock price, irrespective of his creative tweets.
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Similar to many decentralised finance (DeFi) enthusiasts, Celsius (which we will examine further in this column) has a mission statement of wanting to “disrupt the financial industry”. Disrupt it certainly did. Ironically, when it got too hot to handle, its suspension of withdrawals on its lending platform — “extreme market conditions” and a quest to “stabilize liquidity” (its own) were cited — triggered a run starting from a US$12 billion tail in the crypto-sphere. Similarly, Binance put a temporary halt to Bitcoin withdrawals for “technical reasons”. Like Terra Luna, this tail appears to have wagged the dog in the crypto market and spread to asset prices across the “investable assets” kingdom.
Good while it lasts
Celsius operates in a part of the metaverse broadly described as DeFi lending platform. It is unregulated. It pays holders of different crypto currencies attractive returns up to 18.6% in some cases, or 6-7% for more mainstream ones like USD Coin, Ethereum and Bitcoin. Like a bank, but pooling crypto “deposits” for which it pays a very attractive rate, it lends to others for a spread or a premium.
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The borrowers place collateral — other cryptocurrencies — say, at a overcollateralised margin versus what they borrow.
In theory, all this looks good. The depositors get a good return, while the borrowers have access to capital on the platform which earns fees.
Reportedly, part of Celsius’ problems occurred when Lido’s Staked Ether (stETH), which was originally pegged to Ethereum (ETH), diverged. In theory, stETH is ETH locked on the Ethereum 20 beacon chain — parallel to the main Ethereum blockchain which was meant to combine eventually with the Ethereum Mainnet. In technical terms, this merger event was to transition the network for Ethereum from proof-of-work consensus mechanism to proof of stake.
With the merger date uncertain, and stETH de-pegging, if Celsius locked customers funds allegedly into seETH, it may not be able to meet redemptions in the short term. And with crypto prices all and sundry falling, its “over-collateralised” loans to begin with could become “under”, and it or its customers may run short. It is different from Terra Luna’s internal algorithm imploding, but it is a similar unintended consequence of a once-stable peg unravelling.
Looks like a duck, quacks like a duck
One may ask, doesn’t this look like traditional finance? A business that on the one hand promises “depositors” high interest, while on the other, lends to a pool of customers with different credit ratings, with those in the pawnshop paying the most and having to put up a lot of collateral (which may be illiquid Rolex watches or stocks and shares), and triple-A-rated borrowers paying the least (and maybe uncollateralised)?
Well, the answer is yes. Some global regulators have made clear their views that high-yielding crypto lending products could be deemed unregistered securities. And by last September, four US states from New Jersey to Texas had sent Celsius cease-and-desist letters. Even US-listed Coinbase stopped Lend (which promises a 4% yield) after the Securities and Exchange Commission (SEC) was said to have threatened legal action. BlockFi, another DeFi lending platform similar to Celsius, was hit with a US$100 million penalty from the SEC and 32 US states just in February.
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To be fair, Celsius only recently (in May) changed its products to comply with regulators, to gradually phase out high-interest accounts for non-accredited US investors. In a way, it is “guilty as charged” when other crypto bros say they only allow accredited investors (that is, the rich ones) to get richer!
By then, the amount of digital assets on its protocol was already reduced by half to US$12 billion — not all as a result of withdrawals — as crypto-asset prices chilled through winter. But the question is whether their US$8 billion in loans fell correspondingly — so Celsius is solvent — or did the collateral fall quicker? And if everyone pulls out assets, what do they have to lend if they can’t recall loans fast enough?
Once again, Tether, the world’s biggest stable coin — just like during the Terra Luna event — traded below the US$1 peg again, although it has largely held at that level so far. Tether itself is also an equity investor in Celsius, alongside CDPQ, Canada’s second largest pension fund. The other piece of “good news” is that another rival, Nexo, has proposed a buyout of some of Celsius’ loan books.
But here’s a question that is posed two months in a row: if it looks and sounds like a bank, then perhaps there is need to regulate some aspects of it like financial institutions. The other obvious question is, if the return promised is too good to be true, even if it holds for a period of time, it’s unlikely to last.
The crypto purists may bristle at this suggestion, but I am not trying to be morally puritanical advocating the parallel of Too Hot To Handle. What if the bad and ugly actors in this new world of Web 3.0 finance struggle to stay celibate? What if they eschew regulation to ensure that firms in the ecosystem take investor protection from cyber-hacking risks to liquidity management in their models seriously? If so, then it will be harder for the good guys and consumers to realise the jackpot of wider mainstream adoption for payments, the broader use of the benefits that DeFi and some crypto instruments can extend to the noteworthy cause of financial inclusion as they disrupt the engrained operating models of traditional (expensive) banks.
Winter has set in, and often, as the saying goes, the darkest hour is before dawn. I am not sure that it is the darkest hour yet, but we are closer to that than when the Bitcoin’s technical-chart neckline broke at US$48,000 earlier this year. When spring begins next from the rebase which will take time to build, one hopes that there will be more good sense and some sensibility for all participants.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award
