The Celsius Network case, an example of the risk of cryptocurrencies for the uninformed

The Celsius Network case, an example of the risk of cryptocurrencies for the uninformed

After the fall of the Terra Ecosystem (LUNA), several platforms found themselves in a quandary. In particular, the symbolic Celsius Network, recently valued at $4 billion, has suspended withdrawals from its customers.

The rumor circulated for several days. He told himself that the Celsius Network platform was in deep financial trouble and that a default was near. Via tweet on Monday, June 13, 2022 Celsius confirmed the newshowever, not going as far as the rumors claimed.

As such, Celsius has announced that withdrawals and asset transfers between accounts are on hold. For clients, this means that they can no longer withdraw their cryptocurrencies from Celsius or even transfer them between each other. In other words, clients’ assets are frozen without the possibility of a return to the normal set date. If Celsius is at its most advanced stage, other platforms are also suffering, demonstrating the fragility of a still very young sector.

The fall of the Terra (LUNA) ecosystem, the main cause of the difficulties of the Celsius Network (CEL)

Celsius Network is a regulated American platform specializing in lending and borrowing digital assets. Lenders can place their assets there, which are lent to borrowers or which Celsius uses to work on behalf of its clients.

In return, lenders receive interest that can reach more than 10% per year. This interest is usually paid in CEL, the native token of the Celsius Network.

If Celsius is the best known platform of this type, there are others such as the Bulgarian Nexo and the American BlockFi. In addition, many general exchange platforms offer these features. After several fundraisers, Celsius is valued at over $4 billion as it provides easy access to sophisticated decentralized finance (DeFi).

Will Anchor, the Terra protocol (LUNA), bring down the Celsius Network (CEL)?

In order to earn a 10% return, Celsius invests its own funds, as well as those of its clients, in decentralized finance protocols. Some offer returns of around 50% per year or even more. However, as they say, the greater the return, the greater the risk. Therefore, it is possible that the token used to pay out the refund will drop to zero.

This is exactly what happened with Anchor. The latter is a protocol of the Terra ecosystem, also specialized in lending. Users deposited their UST, Terra’s stablecoin, which was supposed to replicate the US dollar, and earn a return of 20% per year. For several months, these indicators did not change, which gave confidence in the protocol and attracted new users.

The only problem is, many had no idea how UST and Terra work. Parity with the dollar was driven by a complex algorithm that could not cope with falling prices and a massive sell-off. Immediate Consequence: UST and LUNA, Terra’s native token, drop to almost 0.

Those who invested in these assets lost everything. Celsius too. However, the platform did not report this large investment in Anchor. With prices plummeting in recent days, Celsius is running out of cash and believes it has no choice but to freeze customer funds. As a direct consequence, the CEL price has lost 90% of its value since its high in July 2021.

Invictus Capital, a lesser-known platform that specializes in creating crypto-asset funds, is also having a hard time for the same reasons. Finally, the sharp price drop on Monday, June 13, 2022 also resulted in a temporary suspension of Bitcoin (BTC) withdrawals on Binance and Crypto.com. However, if the fall is mainly due to the current situation, then it was reinforced by the news about Celsius.

False Promise of Performance

Warren Buffett is credited with many quotes, including this: “When the tide goes down, you can see who’s been swimming naked.” The platforms float naked, usually promising potentially volatile profits. Admittedly, Celsius et al. caution that these results are not guaranteed. However, these warnings are much less visible than the rate of return.

Decentralized finance is a real breakthrough for people, especially for those who cannot get a bank loan. Moreover, traditional finance is very interested in DeFi. However, we must not forget that she is still a growing child: she learns from mistakes. Anchor tends to be a misjudgment by many as the protocol could not work in the face of falling prices and selloffs.

Future regulation?

The fall of the Terra ecosystem, caused by the loss of stablecoin parity, worries regulators who are considering legislation. In Europe, as in the United States, we mention the obligation that the guarantee must be 100% cash. Thus, 10 dollars of stablecoins issued will require 10 dollars in a bank account.

But the collapse of the markets could also lead to greater regulation of platforms like Celsius, which could even lead to them being banned. However, some of its platforms are more serious, starting with Nexo which also offers buy assets of Celsius clients. Likewise, French platforms could play their part in a healthier ecosystem.

But while regulation is important, it should not discourage innovation. However, many are wary of imposing too restrictive regulation in Europe, in particular with the Markets for Crypto Assets (MiCA) draft European regulation, the final version of which could quickly succeed.