- [Narrator] "Banks are not your friends."
That's Alex Mashinsky in the shirt,
founder and CEO of Celsius,
one of the largest crypto lending platforms.
And on June 12th,
his company surprised customers
when it unexpectedly announced
it was pausing all withdrawals, swaps, and transfers
between accounts
due to extreme market conditions.
For reference,
this year, Bitcoin has lost more than half of its value
and another popular cryptocurrency Ether
has fallen around 70%.
- Celsius decision to freeze customer accounts
has rippled across the cryptocurrency industry.
Shortly after its announcement,
another Asia-based crypto lender called Babel Finance
announced that it is also suspending withdrawals.
- [Narrator] Unlike banks, which are FDIC insured,
crypto lenders like Celsius
lack the legal protections
that are built into the traditional financial system.
And as the crypto market continues to tumble,
many users of Celsius and the exchange Coinbase
are beginning to wonder,
"If these crypto platforms go bankrupt,
what happens to my assets?"
Celsius is one of dozens of unregulated lenders
and lending platforms
that have emerged in recent years,
cutting high returns to investors
who are willing to lend their digital assets.
- Celsius promised customers annual percentage yields
as high as 18.6%.
That's a lot more than customers can get
from regular bank accounts today.
- [Narrator] Here's how that works.
Customers deposit their cryptocurrency in the Celsius system
in exchange for a yield.
This is essentially an unsecured loan.
And in order to earn a return,
the company lends out assets to other users
and puts customer deposits in often high yield,
high risk decentralized finance investments.
When the system is working correctly,
Celsius says that customers can expect approval
for their withdrawals within 24 hours.
But as cryptocurrency prices continued to fall,
customers started to withdraw
at a rate Celsius couldn't keep up with.
- Celsius does not have enough liquidity,
meaning readily spendable cryptocurrency on hand
to hand back to the customers.
- [Narrator] The company has since
hired restructuring lawyers
to advise on possible solutions
for its mounting financial problems.
- One of the financing options
included a financial restructuring,
meaning that the company could potentially file
for bankruptcy.
- [Narrator] And if that happens,
users could face big losses.
According to Celsius's terms of use,
users that deposit assets in the earn service
grant the company "all right and title
to such eligible digital assets,
including ownership rights."
That document also calls out bankruptcy explicitly,
saying, "In the event that Celsius becomes bankrupt,
enters liquidation,
or is otherwise unable to repay its obligations,
any eligible digital assets used in the earn service
or as collateral under the borrow service
may not be recoverable."
You will likely not see a line like this
in a user agreement for a bank,
since most banks are FDIC insured.
So what does that mean for users?
- Based on Celsius' terms of use,
in the event of a bankruptcy,
customer who deposited cryptocurrencies
into Celsius accounts
may not be able to get their money back
because they would be considered
essentially unsecured creditors
and even if they were to file for lawsuits against Celsius,
they might not have a great chance
of winning that legal action.
- [Narrator] Similarly, the exchange Coinbase
addressed bankruptcy in its quarterly filings,
adding a disclosure based on SEC accounting guidelines
released in March.
- Coinbase made the disclosure
that in the event of a bankruptcy,
the digital assets that Coinbase holds for its customers
may not really belong to the customers.
- [Narrator] Coinbase noted that the new language
in its financial report
could lead customers to view its service
as "more risky and less attractive."
- Coinbase CEO Brian Armstrong has come out
and said that the likelihood of the company going bankrupt
is extremely low
and the company is in very good financial conditions,
but he made the disclosure
just for the purpose of transparency.
- [Narrator] Nearly one month
after the bankruptcy disclosure,
on June 14th, Coinbase announced it was laying off
around 18% of its workforce.
Armstrong said the decision was made
to ensure Coinbase's health during this economic downturn.
But if a crypto platform like Celsius or Coinbase
were to go bankrupt,
it wouldn't be the first to go under in that way.
In 2014, Mt. Gox,
then the largest crypto asset platform worldwide,
filed for bankruptcy
before ultimately filing for liquidation later that year.
- The collapse of crypto exchange Mt. Gox back in 2014
also rippled across the industry.
It caused the price of Bitcoin to plummet
and brought about, so to speak,
one of the first crypto winters in the industry.
- [Narrator] A rehabilitation plan
for affected Mt. Gox's users
was not confirmed until last fall.
Cryptocurrency as an industry
still lacks comparable regulation and protection
to traditional financial institutions,
but a recent bill looks to change that.
- Senators Cynthia Lummis and Kirsten Gillibrand
proposed a bipartisan crypto bill
that the Responsible Financial Innovation Act,
which aims to provide a comprehensive regulatory framework
for the crypto industry.
- [Narrator] While the bill was released
around the same time
that Coinbase made its bankruptcy disclosure,
it is not in direct response to the platform's announcement.
The bill is not expected to pass
and other lawmakers have not signed on to it.
As for Celsius,
the company is under investigation.
The Texas State Securities Board
said it has opened an investigation into Celsius
over its decision to freeze customer accounts
and is working in conjunction
with New Jersey, Kentucky, Alabama, and Washington.
(gentle music)