The collapse of Celsius Network

This is an audio transcript of the FT News Briefing podcast episodes: The collapse of Celsius Network

Jess Smith
Good morning from the Financial Times. Today is Monday, September 19th, and this is your FT News Briefing.

[MUSIC PLAYING]

Markets are bracing for several big interest rate moves this week. Tech IPO’s have gone awol, and we’ll take a look inside Celsius Network. That’s the multibillion-dollar cryptocurrency lender that’s now in bankruptcy.

Kadhim Shubber
You know, one of the things I’ve heard over and over in reporting is for much of the company’s history, internally, they found it difficult to understand what assets they had easily.

Jess Smith
The FT’s Kadhim Shubber will tell us about his investigation into the company’s collapse and who’s gotten burned. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

[MUSIC PLAYING]

This week, policymakers are meeting at the Bank of England and the central banks of Norway, Sweden and Switzerland, oh yes, and the US Federal Reserve will be talking about interest rates. And we don’t know exactly what they’ll do, but we do know that markets are expecting faster and more aggressive rate hikes. Here’s the FT’s Colby Smith.

Colby Smith
Well, we’ve heard from various central bankers harkening back to the 70s and 80s when inflation was running out of control and how destabilizing that situation was. And what we hear is that mistakes cannot be made again. And so essentially, central bankers hold this incredibly high conviction that they need to get inflation down and they need to slow down the economy. They want to see growth slowing across the board.

Jess Smith
Colby, what are economists saying? I mean, the Fed is widely expected to raise rates by three quarters of a percentage point this week. But beyond that, how high do economists see rates going?

Colby Smith
What economists are more broadly expecting — and this is based off a survey we just ran in partnership with the University of Chicago’s Booth School of Business — those economists expect rates to rise at least above 4 per cent throughout this tightening cycle. And a substantial proportion of the economists that we also surveyed think that rates might need to eventually top 5 per cent.

Jess Smith
So as markets readjust to this, what do you expect investors to do?

Colby Smith
I think people are expecting a lot more volatility. We’ve also seen a repricing of the US government bond prices. So major sell-offs across the board there as yields have crept higher alongside, you know, changing market expectations. But overall, I think this could become a dicey moment, especially for stocks in particular and other risky assets. I think that officials are really coming around to the notion that the economy is going to have to slow considerably. It’s likely that we’re gonna see higher unemployment across the country as well. And that’s not a really hospitable environment for risky assets.

Jess Smith
Colby Smith is the FT’s US economics editor.

[MUSIC PLAYING]

This new environment of rising interest rates has hit technology stocks especially hard, and it’s making technology companies reluctant to list on the public markets. We’re now about to enter the longest drought in major tech IPOs this century. According to Morgan Stanley, this week, it’ll be 238 days without a tech IPO worth more than $50mn. That’s longer than the record set after the 2008 financial crisis and after the dot.com crash of the early 2000s. One banker pointed to all the uncertainty in the market, but he also said tech companies raised so much private capital before the downturn, there isn’t the same sense of urgency to list.

[MUSIC PLAYING]

One of the biggest cryptocurrency companies went bankrupt this summer, and its founder has been accused of running it like a Ponzi scheme.

News clip
Top stories. First up, embattled crypto lender Celsius has filed for bankruptcy. In a statement released on Wednesday, Celsius said it would look to stabilize. . .

Jess Smith
Celsius Network was founded five years ago and it positioned itself as a bank for the crypto world. Customers could deposit crypto assets into an account and earn interest. Hundreds of thousands of people signed on. At one point, the company had $25bn of customers’ assets. The FT’s Kadhim Shubber began reporting on Celsius last October when it received a major investment.

Kadhim Shubber
It was like their biggest funding round. $400mn from two big investors: a US investment group, WestCap, and Canada’s second-largest pension fund, CDPQ. The total amount increased to $600mn at the end of the round. This was a big moment for the company, valued them at $3bn, gave them the credibility of having blue-chip investors.

Jess Smith
And it gave the company ammunition against regulators who’d been cracking down on crypto companies and was skeptical of Celsius’s core product.

Kadhim Shubber
It was like an interest-bearing account for your crypto, so you gave them crypto and then they would give you, you know, 6 per cent a year, 10 per cent a year on certain sort of crypto assets, 18 per cent a year . . .

Jess Smith
It was seductively high. And Celsius also touted the product as safe. Plus, investing in Celsius came with a whole community of believers. They called themselves Celsians. Their leader was the company founder and CEO, Alex Mashinsky.

Alex Mashinsky
On the right. For those of you who are not convinced about this is the way, we brought you some props. . .

Jess Smith
That’s Mashinsky in one of his regular “Ask Me Anything” YouTube videos. He’s wearing one of his signature black T-shirts with a pro-crypto slogan, and his voice is muffled because he’s wearing a mask of the Star Wars character, the Mandalorian. You can hear him bond with the guest over Star Wars.

Guest
Sorry. Sorry. I’ll put on my Han Solo hat.

Jess Smith
Mashinsky is a former telecoms entrepreneur and Kadhim says he has a real marketer’s approach.

Kadhim Shubber
His approach to the business was riding off this kind of post-financial crisis hatred of big banks. You know, the big guys living off, ripping off the little guys. He was here to fix banking. You know, he was taking the money from the big institutions that Celsius lent to and then giving it to the little guy, which was Celsius customers.

Jess Smith
But when Kadhim looked into how Mashinsky was running the company, a couple of things seemed curious to him.

Kadhim Shubber
We just couldn’t really understand the figures in the account. Celsius’s accounts were not that clear, and that’s something that we struggled with, we were trying to get our head around. How is this business actually working? How much money is it making? The second thing, which I remember very vividly, one of the accusations that the state regulators had made was that Celsius was trading with customer assets.

Jess Smith
And it was right there in the company’s financial accounts. Kadhim could see it, so he asked Mashinsky about it.

Kadhim Shubber
And he flat out denied it. They said, well, we don’t trade customer assets. That’s not how we generate the interest that we give to our customers. And, you know, we’ve since discovered that actually the company did trade customer assets. They had a trading team, they had traders in lots of jurisdictions around the world.

Jess Smith
Celsius was also putting customer deposits into risky, untested investments. Kadhim also discovered that Celsius was pouring cash into a bitcoin mining business and the company was losing money because it was paying out more in interest than it could generate. Then in June of this year, this happened.

News clip
While crypto lender Celsius has paused withdrawals, swaps and transfers on its platform, fueling a broader sell-off already taking place in digital assets. . .

Jess Smith
The following month, Celsius filed for bankruptcy.

Kadhim Shubber
It is important to understand that there is a very real human impact here. There’s about 300,000 people who had balances of, say, $100 or more. And obviously, there’s a, you know, a number who have balances in the millions.

Jess Smith
A lot of Celsius customers were unsophisticated investors. They say they didn’t have a deep understanding of the risks they were taking and they were putting their real non-digital money into this largely unregulated and uninsured product. Now, you could say it’s a risk they took. It’s a choice they made, and they should take responsibility. Kadhim kind of agrees.

Kadhim Shubber
It is you know, it is perfectly reasonable to point out that that is not a very smart thing to do, but that is how humans will behave. You know, you will have people marketing products very effectively and people really will put all their money into it. And so we have to ask ourselves, what can we do to, you know, mitigate the potential harms that come from that unavoidable and, you know, human behavior that you see time and time again with, you know, financial products.

Jess Smith
Celsius says it has a plan to get out of bankruptcy using proceeds from its cryptocurrency mining business. Last week, the bankruptcy judge approved the government’s request to appoint an independent investigator. Meanwhile, Celsius customers are waiting to see when they’ll get their money back and how much.

[MUSIC PLAYING]

You can read more about all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: [email protected]. We will do our best to make the amendment as soon as possible.

Leave a Reply

Your email address will not be published.