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Behind the Celsius Sales Pitch Was a Crypto Firm Built on Risk
The lender had little cushion in the event of a downturn or mass withdrawals, investor documents show
Celsius Network LLC CEO Alex Mashinsky built his cryptocurrency lender into a giant on a pitch that it was less risky than a bank with better returns for customers.
But investor documents show the lender carried far more risk than a traditional bank.
The lender issued numerous large loans backed by little collateral, according to Celsius investor documents from 2021 reviewed by The Wall Street Journal. The documents show that Celsius had little cushion in the event of a downturn, and made investments that would be difficult to quickly unwind if customers raced to withdraw their money. Celsius didn’t respond to requests for comment from the Journal.
Celsius had $19 billion of assets and roughly $1 billion of equity as of last summer, before it raised new funds, according to Celsius investor documents from 2021 reviewed by the Journal. The median assets-to-equity ratio for all the North American banks in the S&P 1500 Composite index was about 9:1, or about half that of Celsius, according to data from FactSet.
For banks, that ratio is of great importance: Regulators look at it as an indicator of risk. For unregulated companies like Celsius, the ratio of 19-1 is particularly high given that some of its assets were investments in the extremely volatile crypto sector, said Eric Budish, an economist at the University of Chicago’s business school who studies cryptocurrencies. Large banks often have ratios near Celsius’s, but they hold much more stable assets and have access to central-bank loans for ready cash.
“It’s just a risky structure,” Mr. Budish said of Celsius. “It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006,” referring to a feature of the 2008 financial crisis. “It was all housing—here it’s all crypto.“
The five-year-old company is now one of the highest profile crypto firms fighting for survival, as the sector is struggling amid a plunge in cryptocurrency values. Last week, Celsius tapped consultants to advise on a potential bankruptcy filing, the Journal previously reported. That followed the company’s June 12 freeze on all withdrawals, citing “extreme market conditions.”
Celsius’s future is being watched closely in a market that features a web of crypto financial firms lending to each other, where many investors fear contagion. With sliding crypto prices, crypto investors are being asked to put down more collateral on their loans to prevent liquidation.
Crypto broker Voyager Digital issued a default notice to Three Arrows Capital after the hedge fund failed to make payments on its loan of $675 million. The hedge fund suffered heavy losses on the collapse of the cryptocurrency TerraUSD. Last week, rival lender BlockFi announced it had struck a deal for a $250 million line of credit from a cryptocurrency exchange amid concerns by its own depositors. Smaller firms have frozen withdrawals, too.
Founded in 2017 by Mr. Mashinsky, Celsius surged amid the crypto boom to become one of the biggest crypto lenders, with more than $12 billion in deposits. Customers, wooed by high interest rates, flooded in, while venture capitalists showered it with money.
Contrasts with banks were at the center of Mr. Mashinsky’s public persona. Mr. Mashinsky frequently said Celsius passed along 80% of its lending revenue to customers in the form of its high yields. He often wore a black T-shirt reading, “Banks are not your friends.”
Compared with banks, “we have much less risk, but we’ve managed to deliver high single-digit, low double-digit numbers,” Mr. Mashinsky told the YouTube channel CTO Larsson in August. Mr. Mashinsky said on a podcast last month that while “normally in panic, everybody runs to the bank and withdraws their money because they’re afraid the bank is going to fail,” Celsius had proven different in crypto downturns, as its business increased.
With growth rocketing upward, the company raised $750 million last fall in a round led by venture-capital investor WestCap and Canadian pension fund Caisse de dépôt et placement du Québec. The funding, which could have lowered Celsius’s leverage ratio depending how it was deployed, valued the company at more than $3 billion.
Key to Celsius’s fundraising pitch was its fast-growing profits. Celsius gave projections to investors last spring showing deposits would top $108 billion in 2023, and revenue would hit $6.6 billion, according to documents it provided to investors in advance of raising money. It forecast that its earnings—before accounting for charges such as interest or depreciation—would be $2.7 billion in 2023, more than six times its 2021 profit projection.
Adding to Celsius’s leverage was money borrowed from others including Tether International Ltd., which issues a cryptocurrency pegged to the U.S. dollar. As of last summer, Celsius had a credit facility for up to $1.1 billion from Tether, which itself was an early investor in Celsius with a 7.8% stake in the lender as of last spring, Celsius told investors.
A spokeswoman for Tether said that there is no link between the company’s investment in Celsius and Tether’s reserves or stability. She added that the credit facility has been liquidated with no losses to Tether, without saying when and why it had been liquidated.
Celsius’s appeal to consumers lay with high interest rates offered on their deposits. Customers parking their crypto with Celsius were rewarded with annual yields up to 18.6% on some cryptocurrencies and 7.1% on stablecoins—cryptocurrencies pegged to the dollar—that was much higher than rates of about 0.1% offered by many U.S. bank savings accounts.
Like a bank, Celsius was able to pay yields to customers largely by making money through lending at even higher yields to others.
One of its biggest units was lending to other crypto financial businesses, including digital-asset manager Galaxy Digital and institutional crypto-lending firm Genesis, Celsius told investors. Celsius projected in May 2021 that institutional lending would bring in about $290 million of revenue for the year, more than one-quarter of total revenue, the documents reviewed by the Journal show.
While banks like loans to be overcollateralized—homeowners taking out a mortgage post their house as collateral, which is valued at more than the loan—Celsius required its business borrowers to post only an average of about 50% collateral on its $2.7 billion of loans as of last spring, the documents show. Undercollateralized lending is considered a risky practice, one that was more generous than that of many of Celsius’s competitors.
Celsius used some of that collateral to borrow more money itself, a process known as rehypothecation, adding additional risk.
While regulators push big banks to keep some of their assets in categories such as cash or bonds that can be liquidated quickly, Celsius had large portions of its assets tied up investments in financial products that are difficult or impossible to cash out of quickly, adding to its vulnerability in the event of a wave of withdrawal.
Many of these investments were done through a technique called “staking” cryptocurrencies, which is akin to a certificate of deposit account at a bank, in which Celsius was guaranteed a high interest rate in exchange for not being able to access the cryptocurrencies for months.
One of Celsius’s such investments was known as Synthetix, offering Celsius around 23% annual yield, though Celsius had to keep the money in the investment for about a year, according to one of the documents. Celsius owned $90 million of Synthetix’s tokens as of May.
Another big investment was related to the cryptocurrency ether. Celsius recently placed at least $470 million in so-called Lido-staked ether, an investment product managed by Lido Finance that prohibited Celsius from quickly removing its assets, the Journal previously reported. Staked ether is tied up until the long-delayed release of a new version of the Ethereum blockchain that the Ethereum platform said would happen “soon” but didn’t specify a date.
Celsius’s investor documents said it had $3.7 billion in assets as of spring 2021 in a broad category of staking and decentralized finance, which includes other forms of crypto lending.
Other Celsius investments included its own bitcoin-mining operation and a futures-arbitrage practice. The falling price of bitcoin has eaten into bitcoin miners’ bottom line in recent months.
Smaller crypto lenders are facing problems similar to Celsius’s, with their investments tied up amid a wave of margin calls and withdrawals. Given that lenders often borrow from other lenders, companies throughout the sector are rapidly depleting on-hand cryptocurrency reserves, analysts say.
Many see notes of past banking busts. Contagion was a feature of the 2008 global financial crisis, when bank-lending practices—including rehypothecation—left them short on cash.
“None of this is new. We’re just kind of repeating everything we’ve done before,” said Joe Abate, a research analyst at Barclays.
>>> Up
* Autoliv Raised to Neutral at Exane; PT $86
* Continental Raised to Outperform at Exane; PT 91 euros
* ING Raised to Add at AlphaValue/Baader
* Merlin Properties Raised to Buy at BofA (+)
* PSP Swiss Raised to Buy at BofA (+)
* Sandvik Raised to Outperform at RBC; PT 240 kronor
>>> Down
* Altria Cut to Underweight at Barclays; PT $36
* Anglo American Cut to Hold at Deutsche Bank
* British Land Cut to Underperform at BofA (+)
* Carnival PT Cut to $7 from $13 at Morgan Stanley
* Big Yellow to Buy Prime Site in Slough From Segro (+)
* Covivio Cut to Underperform at BofA (+)
* Diageo Cut to Sell at Deutsche Bank; PT 3,230 pence
* Eurofins Scientific Cut to Hold at Stifel; PT 80 euros (+)
* Fluidra Cut to Neutral at Grupo Santander; PT 29.40 euros (+)
* Fnac Darty Cut to Neutral at Oddo BHF; PT 50 euros (+)
* Gecina Cut to Neutral at BofA (+)
* Great Portland Cut to Neutral at BofA (+)
* ICADE Cut to Underperform at BofA (+)
* Inmobiliaria Colonial Cut to Underperform at BofA (+)
* Land Sec. Cut to Neutral at BofA (+)
* Nike PT Cut to $125 from $140 at Barclays
* NOS Cut to Underweight at JPMorgan; PT 3.70 euros
* PostNL Cut to Neutral at Oddo BHF; PT 2.75 euros (+)
* SAS, Unions and Mediators Agree to Extend Mediation Deadline
* Stellantis Cut to Neutral at Exane; PT $16.85
* Swisscom Cut to Neutral at JPMorgan; PT 676 Swiss francs
* Telekom Austria Cut to Neutral at JPMorgan; PT 7.10 euros
* Telenet Cut to Equal-Weight at Morgan Stanley; PT 27 euros
* Travis Perkins Cut to Neutral at JPMorgan; PT 1,200 pence
* Vantage Towers Cut to Underweight at JPMorgan; PT 27 euros
* Vodafone Cut to Neutral at JPMorgan; PT 168 pence
* Workspace Cut to Underperform at BofA (+)
>>> Initiation
* Ageas Rated New Overweight at Barclays; PT 59 euros
* Azelis Rated New Hold at Jefferies; PT 22 euros
* Basilea Reinstated Buy at Bryan Garnier; PT 52 Swiss francs (+)
* Eastnine Rated New Buy at Pareto Securities; PT 100 kronor (+)
* Ergomed Rated New Buy at Stifel; PT 1,200 pence (+)
* Galliford Try Rated New Buy at Panmure Gordon; PT 230 pence
* IMCD Initiated at Buy and Preferred to Azelis at Jefferies
* Vossloh Rated New Outperform at Oddo BHF; PT 38.50 euros (+)
>>> Call
* Carnival PT to Street-Low at Morgan Stanley, Sets $0 Bear Case (+)
* Deutsche Bank’s Medium-Term Earnings Prospects Unclear: Metzler (+)
* Diageo Downgraded to Sell at Deutsche Bank on Looming Headwinds
* Just Eat Rated Sell at Berenberg on Muted Trading, Grubhub Sale
* Sandvik Upgraded at RBC on Mining Outlook, Solid Tooling Arm
* Telenet Cut at MS on Slow Capital Allocation Strategy Progress
US blacklists Chinese companies for allegedly supporting Russian army
Washington says sanctions send ‘powerful message’ to anyone backing Moscow’s Ukraine invasion
The Biden administration has placed five Chinese companies on an export blacklist for violating sanctions by allegedly providing support to Russia’s military and defence companies before and during the invasion of Ukraine.
The commerce department put the Chinese firms on the “entity list”, which effectively bars US companies from exporting to them. The companies, which are not globally recognised names, are Connec Electronic, King Pai Technology, Sinno Electronics, Winninc Electronic, and World Jetta (HK) Logistics.
“Today’s action sends a powerful message to entities and individuals across the globe that if they seek to support Russia, the US will cut them off,” said Alan Estevez, under-secretary of commerce.
The blacklisting was announced as the US grows increasingly worried about strengthening ties between Beijing and Moscow, particularly after Xi Jinping and Vladimir Putin in February signed a statement that described the China-Russia partnership as having “no limits”.
The Financial Times reported in March that China had signalled a willingness to provide military assistance to Russia, which set off alarm bells in Washington.
Over the past two months, Jake Sullivan, US national security adviser, and Lloyd Austin, secretary of defence, have warned their Chinese counterparts that Washington would take strong action if China gave Russia any military equipment or assistance. US officials said there was no evidence that China has provided military assistance.
The commerce department did not accuse the Chinese government or military on Tuesday of supplying equipment to the Russian army. “We have not seen China provide Russia with military equipment or systematic evasion of sanctions,” said a White House official.
But the decision to place the companies on the entity list emphasised the broader concern about ties between China and Russia. It also marked the first time that President Joe Biden’s administration has penalised Chinese entities for helping the Russian military since Putin launched the invasion of Ukraine in February.
Chinese and Russian nuclear bombers flew over the Sea of Japan last month while Joe Biden was in Tokyo, further stoking US anxieties. Experts said the exercise highlighted how Beijing was co-operating with Moscow even as Russian forces waged their assault on Ukraine.
The Chinese embassy in the US said Beijing was playing a “constructive role” in promoting peace talks and had not provided military assistance to Russia.
“China and Russia maintain normal energy and trade co-operation, and the legitimate interests of Chinese companies should not be harmed,” said an embassy spokesperson, who criticised Washington for imposing unilateral sanctions under its “long-arm jurisdiction”.
>>> TradeGate Pre-Market Indications
DAX:
Continental (CON TH) +1.5%
Continental Raised to Outperform at Exane; PT 91 eurosDeutsche Bank (DBK TH) -1.2%
MDAX:
Commerzbank (CBK TH) -0.8%Irish Government Joins European Bank Share Sale Spree: ECM WatchRheinmetall (RHM TH) -1.1%Delivery Hero (DHER TH) -1.6%
SDAX:
Heidelberger Druck (HDD TH) +1.2%flatexDEGIRO (FTK TH) -1.3%FlatexDegiro Fined EU2m by Dutch Regulator for Reporting ErrorsAdler Group (ADJ TH) -4.9%
- H&M (HMSB TH) +4.4%
- *H&M 2Q PRETAX SEK4.78B, EST. SEK3.98B
- E.On (EOAN TH) -1.1%
- Deutsche Bank (DBK TH) -1.2%
- Adidas (ADS TH) -1.2%
- Vodafone (VODI TH) -1.3%
- Rheinmetall (RHM TH) -1.6%
- HelloFresh (HFG TH) -1.8%
- Renault (RNL TH) -1.8%
- Delivery Hero (DHER TH) -1.9%
- Pearson (PES TH) -2.5%
- Grifols (OZTA TH) -3.3%
- Grifols in Talks With Funds to Raise Up to EU2b: Confidencial
Meta, TikTok Could Face Civil Liability for Addicting Children in California
Social-media platforms are lobbying to stop first-in-the-nation proposal allowing government attorneys to sue them for features alleged to harm minors
SACRAMENTO, Calif.—Social-media companies such as Facebook parent Meta Platforms Inc. META -5.20%▼ could be sued by government attorneys in California for features that allegedly harm children through addiction under a first-in-the-nation bill that cleared a crucial vote in the state Senate late Tuesday.
The measure would permit the state attorney general, local district attorneys and the city attorneys of California’s four largest cities to sue social-media companies including Meta—which also owns Instagram—as well as TikTok, owned by Chinese company ByteDance Ltd., and Snap Inc. SNAP -5.70%▼ under the state’s law governing unfair business practices. The bill would allow lawsuits if a prosecutor believes a company employed features it knew or should have known would addict minors.
The bill passed in California’s Senate Judiciary Committee by a vote of 8-0. Youth advocates, teacher’s unions and consumer groups spoke in support of the bill during a hearing earlier in the day.
Activist Larissa May told lawmakers that at one point during college, she was spending more than 14 hours a day in one social media app.
“I was addicted to the place that was killing me, that was reminding me of who I would never become, what I would never look,” she said. “There needs to be some accountability. The more that we suffer, the more money that they make.”
Dylan Hoffman, executive director for California and the Southwest at the industry group Technet, testified that the measure would violate free speech rights because algorithms used to curate content on social media platforms are a protected form of speech.
In a version of the bill that passed the state Assembly in May, parents would have been able to sue the companies for harm to their children, with a minimum $1,000 payout for a claimant in class-action lawsuits. Addiction was defined as the use of social media that is difficult to reduce despite a desire to do so and that causes physical, mental, emotional, developmental or material harms.
But after lobbying from business and tech-industry groups, the chairman of the state Senate Judiciary Committee and the bill’s author agreed this past weekend to amend the bill so that only government attorneys can file the suits.
Tech companies would still face civil penalties of up to $25,000 for a violation or $250,000 if they are shown to have knowingly employed harmful features. A provision that would have allowed retroactive lawsuits was removed.
The measure will now head to the state Senate Appropriations Committee and, if it advances, to the full Senate, where it must be approved before the end of the legislative session in August. Democratic Gov. Gavin Newsom hasn’t taken a public position.
In an interview before the changes made over the weekend, Mr. Hoffman said the bill would potentially open companies to hundreds of millions of dollars in liability and prompt them to abandon the youth market nationwide.
“How do you geofence this just to California? We’re talking about websites and platforms that aren’t only across all of the states, but across all of the world,” he said.
Mr. Hoffman said Technet members would prefer to work with legislators on a separate bill regulating design features for children, which also passed the Judiciary Committee Tuesday.
Mr. Hoffman said Technet is still evaluating the proposed amendments and declined to comment on how they might affect the group’s view of the bill.
Representatives for Snap, Twitter Inc. and ByteDance declined to comment on the bill. A Meta representative said the measure would do nothing to encourage companies to make meaningful changes.
Internet-privacy advocates including the Electronic Frontier Foundation have also opposed the legislation, saying it could blur the line between product liability and freedom of speech.
Assemblyman Jordan Cunningham, a Republican who authored the legislation, said it is needed because social-media companies try to maximize children’s time on their platforms despite negative mental-health consequences.
“I don’t care if at the end of the day, nobody gets sued,” he said. “I just want to create the financial incentives for them to stop using features that are harming children.”
Reporting by The Wall Street Journal last year and congressional hearings that followed revealed internal research from Facebook suggesting the company knew its algorithms were harming children by contributing to mental-health issues, particularly among teen girls. Chief Executive Mark Zuckerberg has said the hearings painted a false picture of Meta, and company representatives have said the research on the harms of social-media use is inconclusive.
California’s proposal is the latest example of state lawmakers’ attempts to regulate social-media companies as federal legislation remains stalled. A bill that died in the Minnesota Legislature this year would have banned the use of social-media algorithms on children.
Despite a flurry of one-on-one meetings with California state legislators last month, tech lobbyists were unable to stop the bill from passing on a bipartisan 51-0 vote in the state Assembly. About two dozen Assembly members abstained.
Meta, Twitter and Snap have individually lobbied against the California measure, according to state lobbying disclosures. Meta has taken a lead role in pressuring lawmakers to oppose the legislation, according to several people who work in the legislature.
Meta says it has tightened age-verification protocols on Instagram, provided “nudges” that prompt teens away from certain topics if they have been scrolling through for a significant time, and it now allows parents to block children’s access to the app during certain times of day.
“We want to make sure that the people on our platforms have a safe and positive experience,” said Jennifer Hanley, Meta’s North American head of safety.
How a Creative Agency Is Helping Luxury Brands to Understand the Metaverse
Paris-based Al Dente has developed a game to help employees at luxury groups like Kering to get to grips with Web3 — and NFTs are next.
An NFT from Al Dente's upcoming line "The New Face."
COURTESY OF AL DENTE
PARIS — Patrizio Miceli, head of creative agency Al Dente, has spent the last year helping luxury brands prepare for the Web3 revolution. Metaverse, NFTs, cryptocurrencies and gaming are the new buzzwords feeding the conversation, but he quickly realized that not everyone understands the language.
Al Dente’s solution was to develop “The Serious Game,” which allows firms to familiarize their employees with the next iteration of the internet and identify communities of Web3 enthusiasts within their ranks. “Because the only way to understand this space is to experience it,” Miceli explained.
The first to offer the game on social platform Discord was French luxury group Kering, the owner of brands including Gucci, Balenciaga, Saint Laurent and Bottega Veneta.
“They thought 300 people would sign up. They ended up with 2,000 participants,” Miceli said. “We’re in a ‘test and learn’ phase with some brands on very sophisticated ideas. But we realized the first priority today is to help luxury groups understand the subject in-depth, so they can exchange between services and work off the same knowledge base to move forward.”
A Snowy Owl NFT from Al Dente’s “The Serious Game.”
COURTESY OF KERING
Al Dente aims to further rally the luxury community around the metaverse with its own line of NFTs, developed with Dazed fashion director Imruh Asha, launching next fall.
“‘The New Face’ aims to create the first meta-luxury community made up of executives and designers from the worlds of fashion, luxury and Web3. Access will initially be through referrals to enable creative and prolific interactions between these worlds,” Miceli said.
According to a new report by Morgan Stanley, social gaming could add up to $20 billion to the luxury sector’s total addressable market, while NFTs in the form of luxury collectibles could become a $25 billion business in Morgan Stanley’s “blue-sky analysis.”
Miceli spoke to WWD about how luxury brands can navigate the metaverse jungle, how the new technology will impact e-commerce and how digital identities will evolve in a post-physical world.
WWD: What have you been doing in the last year to establish Al Dente as an authority on the metaverse?
Patrizio Miceli: After charging full speed ahead, we’re taking a step back on certain subjects that are taking much longer than expected, namely the actual definition of the metaverse.
The interconnection between all the metaverses and the physical world does not yet exist, and won’t exist until a few years from now.
The world of metaverses has not yet been consolidated. Rather, we’re in a phase where we’re seeing metaverses emerge based on functionalities. Some are more gaming-oriented, others are more social platforms, some are there primarily to showcase art. Just as there are dozens of tokens being launched every week, there are dozens of metaverses popping up. Our role is to act as homing devices for brands to analyze all the possibilities and come back with concrete strategies, and to have the capabilities to execute them in-house.
We’re working with most of the [luxury] groups on concrete projects to develop NFTs and the metaverse.
Patrizio Miceli
PHOTOGRAPH BY JD/COURTESY OF AL DENTE
WWD: Why was it important for Al Dente to have its own plot in The Sandbox, the community-driven platform that allows players to build, own and monetize their gaming experiences?
P.M.: It was important to be able to do “test and learn” experiments for brands. We need to experience and find out things for ourselves.
The founding principle of Web3 is decentralization. Metaverses are concentrations of communities in spaces that have tokens.
That’s one of the things that we explain to brands, that customers have become shareholders.
We have to find metaverses that are in line with the aesthetics of luxury and offer fluid navigation. It’s still some time before millions of people can connect live to a 3D world.
Metaverse experiences should incorporate the aesthetic aspect, architecture, community and gaming. Those are the key ingredients.
WWD: How will the metaverse change e-commerce?
P.M.: E-commerce is about to undergo a profound transformation.
In the future, brands will have two websites, one in Web2 and one in Web3. The Web3 sites will be a fantastic revolution because luxury brands have always struggled to recreate the in-store experience online.
What’s considered a satisfying experience in Web2 is to buy an item with as few clicks as possible. It’s not about the brand experience.
The great strength of Web3 will be to amplify the physical experience with a vision steeped in community and gaming.
You’ll have an experience that’s different from the traditional retail experience, but just as powerful emotionally.
An NFT from Al Dente’s upcoming line “The New Face.”
COURTESY OF AL DENTE
WWD: Tell us about your new line of NFTs.
P.M.: We plan to launch our line of NFTs in September. We’ve been working on it for four months.
We worked with Imruh Asha, the fashion editor of Dazed, and a lab specialized in 3D realism, to develop a line of masks. And behind this line of NFTs, there’s a roadmap that will incorporate philanthropic collaborations.
It’s going to be the first line of 3D realistic NFTs autogenerated from 356 traits, which can be combined with 60 preset colors and materials. A computer algorithm combines them. We’re going to produce roughly 2,500 NFTs.
The line is designed to help people in the fashion industry become more receptive to the new aesthetics born of Web3.
We’re going to put them in touch with new talents and launch collaborations with brands and charities.
The NFT line is called “The New Face” because it’s going to redefine digital identities through these highly creative masks. It’s a nod to the new faces board at modeling agencies, which people are always looking at to find the next big thing. Web3 is going to usher in a whole new aesthetic.