Even before selling pressure started hitting DeFi platforms, regulators had been sounding the alarm on Celsius for some time. The platform, which in 2021 said it had more than $20 billion in crypto assets and one million customers, has been hit by actions from multiple US states as part of a review aimed at determining whether interest-bearing crypto accounts violated securities laws.
With lucrative returns of up to 18%, these warnings were easily ignored, even though the terms clearly stated that collateral posted on the platform might not be recoverable in the event of bankruptcy.
Yet the FOMO that has won over punters also seems to have worked its magic on professional financiers.
Those seemingly unsustainable rewards appeared to sway officials at the CA$420 billion ($326.7 billion) Quebec pension fund, which, along with venture capital firm WestCap Group, led a $400 million investment valuing Celsius to 3 billion last year – even after US warnings.
Not to mention the decision by former Royal Bank of Canada chief financial officer Rod Bolger to take the same role at Celsius in February, replacing an executive who was suspended after his arrest in Israel in connection with suspected fraud. (He dismissed the allegations.)
The official view of Caisse de Dépôt et Placement du Québec (CDPQ) at the time of its announced $150 million investment was that it was a bet on the disruptive potential of blockchain technology – or, as Quebecers say, “block chains”. .”
These rewards appear to have drowned out the risks of DeFi bank-like products that lack bank-like oversight. These risks include the panic spiral of falling prices, forced selling and bank-like loss of confidence that would push lending activity to the limit.
And the excitement of what the CPDQ called a hunt for the crypto “rough diamond” also appears to have relegated US fears over Celsius to the background.
Now, to be clear, it’s easy to criticize in hindsight. That’s just a drop in the bucket for the crypto market, which topped $3 trillion in November but slipped below $1 trillion on Monday. “Our team is closely monitoring the situation,” the Canadian pension fund said in a statement.
Yet even in calmer times, Mashinsky’s own description of Celsius’ business model last year showed the pressure to continue swinging towards the close: with more than 100,000 to 115,000 bitcoins held in exchange for of 6-7% interest, the platform had to generate 6,000-7,000 bitcoins “just to break even” with customers, he explained – hence the expansion into the mining, capex-heavy and competitive business, and plans for a credit card.
For a pension fund that can’t or won’t dabble directly in cryptocurrencies, this type of business might have seemed like an ideal pick and shovel game — especially in an era of low interest rates. But even then, only after swallowing a fair amount of Kool-Aid blockchain and ignoring the rumblings of concern from the watchdogs.
As for Bolger’s take on his time at Celsius as CFO, he includes pride in having “a world-class risk management team” using practices “similar to other major financial institutions” – and also a healthy dose of optimism that crypto lending is lowering “barriers”. “fund. None of this is on display today.
He wouldn’t be the first banker to be tempted by the allure of crypto wealth: the prospect of fewer regulatory constraints and more money has seen many finance workers change jobs. Staff flows from banks to fintech companies between 2020 and 2022 are telling, such as the 37 Goldman Sachs Group Inc. employees who joined Coinbase Global Inc.
Even if the crypto dominoes crumble, the pressure on banks and funds to jump on the crypto and DeFi train won’t go away easily: JPMorgan Chase & Co. wants to bring “trillions of dollars” of assets into DeFi, and PWC’s annual crypto coverage This year’s fund report found that more than 40% of funds used borrowing and lending for juice returns – perhaps one reason why Mike Novogratz thinks two-thirds of crypto hedge funds will fail.
Yet the irony now is that as regulators sift through the wreckage, they will seek to make DeFi look more like a bank – with the higher costs, lower profits and rising checkboxes that this entails. ING Groep NV Economist Teunis Brosens says of Celsius: “If that doesn’t illustrate why crypto regulation is welcome, I don’t know what it does.”
When the first banker returns to TradFi from DeFi, we will have Quebec retirees to thank.
More from Bloomberg Opinion:
• The value of crypto comes from the volatility of crypto: Tyler Cowen
• Matt Levine’s Money Stuff: Crypto, Clearing and Credit
• When Crypto Tulipmania meets the real economy: Lionel Laurent
(Adds a comment from the Quebec pension fund.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
More stories like this are available at bloomberg.com/opinion
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Post expires at 3:05am on Friday June 24th, 2022