The Collapse of the Celsius Network

This is an audio transcription of the FT press briefing podcast episode: The Collapse of the Celsius Network

Jesse Smith
Hello from the Financial Times. Today is Monday, September 19, and it’s your FT News Briefing.

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Markets are bracing for several big moves in interest rates this week. Tech IPOs have soared, and we’ll take a look inside Celsius Network. It is the multi-billion dollar cryptocurrency lender that is now bankrupt.

Kadhim Shubber
You know, one of the things I’ve heard over and over again in the news is that for much of the company’s history, internally, they struggled to easily understand what assets they had.

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

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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 will do, but we do know that the markets expect faster and more aggressive rate hikes. This is Colby Smith from the FT.

Colby Smith
Well, we’ve heard various central bankers look back to the 70s and 80s when inflation was spiraling out of control and how destabilizing that was. And what we mean is that the mistake can no longer be made. And so, basically, central bankers have this incredibly high belief that they have to bring inflation down and they have to slow down the economy. They want to see growth slow down at all levels.

Jesse Smith
Colby, what do the economists say? I mean, the Fed is expected to hike rates by three-quarters of a percentage point this week. But beyond that, how far do economists see rates rising?

Colby Smith
What economists more broadly expect – and this is based on a survey we just conducted in partnership with the University of Chicago Booth School of Business – these economists expect rates to rise in least above 4% throughout this tightening cycle. And a significant proportion of the economists we also polled believe that rates may eventually need to rise above 5%.

Jesse Smith
As the markets adjust to this, what do you expect from investors?

Colby Smith
I think people expect a lot more volatility. We have also seen a revaluation of US government bond prices. So massive selling across the board there, as yields rose in line with, you know, changing market expectations. But overall, I think it could become a risky time, especially for stocks in particular and other risky assets. I think officials are really coming to the idea that the economy is going to have to slow down significantly. It is likely that we will also see higher unemployment across the country. And it’s not really a hospitable environment for risky assets.

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

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This new environment of rising interest rates has hit tech stocks particularly hard and is making tech companies reluctant to list on public markets. We are now about to enter the longest dry spell in major tech IPOs this century. According to Morgan Stanley, this week there will be 238 days without a tech IPO worth more than $50 million. 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 market uncertainty, but he also said tech companies had raised so much private capital before the downturn that there wasn’t the same sense of urgency to list.

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One of the biggest cryptocurrency companies went bankrupt this summer and its founder was accused of running it as a Ponzi scheme.

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Best stories. First, embattled crypto lender Celsius filed for bankruptcy. In a statement on Wednesday, Celsius said it would look to stabilize. . .

Jesse Smith
Celsius Network was founded five years ago and has 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 up. At one point, the company had $25 billion in client assets. The FT’s Kadhim Shubber started reporting on Celsius last October when he received a major investment.

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

Jesse Smith
And it gave the company ammunition against regulators who had cracked down on crypto companies and were skeptical of Celsius’ core product.

Kadhim Shubber
It was like an interest bearing account for your crypto, so you gave them the crypto and then they gave you, you know, 6% per year, 10% per year on certain types of crypto assets, 18% per year. . .

Jesse Smith
It was seductive. And Celsius also touted the product as safe. Moreover, investing in Celsius came with a whole community of believers. They were called the Celsians. Their leader was the company’s founder and CEO, Alex Mashinsky.

Alex Mashinsky
OK. For those of you who aren’t convinced this is the way, we’ve brought you some accessories. . .

Jesse Smith
It’s Mashinsky in one of his regular “Ask Me Anything” YouTube videos. He wears one of his signature black t-shirts with a pro-crypto slogan, and his voice is muffled as he wears a mask of the star wars character, the Mandalorian. You can hear her bonding with the guest star wars.

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

Jesse Smith
Mashinsky is a former telecom entrepreneur and Kadhim says he has a real marketing approach.

Kadhim Shubber
His approach to business overcame that kind of post-financial-crisis hatred for big banks. You know, the big ones live off the little ones. He was here to fix the bank. You know, he took the money from the big institutions that Celsius lent to and then gave it to the little guy, who were clients of Celsius.

Jesse Smith
But when Kadhim looked at how Mashinsky ran the business, a couple of things struck him as curious.

Kadhim Shubber
We just couldn’t quite figure out the account numbers. The Celsius accounts weren’t so clear, and that’s something we struggled with, trying to figure out. How does this business actually work? How much money does it bring in? The second thing, which I remember vividly, one of the accusations made by state regulators was that Celsius was trading with client assets.

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

Kadhim Shubber
And he flatly denied it. He said, no, we don’t trade client assets. This is not how we generate interest in our customers. And, you know, we’ve since found out that the company actually traded in customer assets. They had a trading team, they had traders in many jurisdictions around the world.

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

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While crypto lender Celsius has suspended withdrawals, trades and transfers on its platform, fueling a broader sell-off already underway in digital assets. . .

Jesse 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 are about 300,000 people who had balances of, say, $100 or more. And obviously there’s a, you know, a number that have balances in the millions.

Jesse Smith
Many Celsius clients were unsophisticated investors. They say they didn’t have a thorough understanding of the risks they were taking and were putting their real, non-digital money into this largely unregulated and uninsured product. You could say it was a risk they took. It is a choice they made and they must take responsibility for it. Kadhim sort of agrees.

Kadhim Shubber
It’s you know, it’s perfectly reasonable to point out that it’s not a very smart thing to do, but that’s how humans will behave. You know, you’ll have people who will market products very effectively and people will really put all their money into it. And so we have to ask ourselves, what can we do to, you know, mitigate the potential damage that comes from this inevitable and, you know, human behavior that you see time and time again with, you know, financial products.

Jesse Smith
Celsius says he has a plan to emerge from bankruptcy using proceeds from his 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 get their money back and how much.

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You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back tomorrow for the latest trade news.

This transcript was generated automatically. If by any chance there is an error, please send the details for a correction to: typo@ft.com. We will do our best to make the change as soon as possible.

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