Shalini Nagarajan

Bitcoin Cash proponent Roger Ver is once again feuding with an embattled crypto company over bad trades worth millions of dollars — this time, it’s a subsidiary of bankrupt lender Genesis.



Genesis subsidiary GGC International filed a court summons in New York earlier this week, demanding Ver pay no less than $20 million to cover a set of crypto options, which expired at the end of December.



Ver, once referred to as “Bitcoin Jesus” for his BTC evangelism before staunchly supporting the Bitcoin Cash hard fork in 2017, says he won’t be paying up.&nbsp;



In a <a href="https://www.reddit.com/r/btc/comments/10ki2ll/did_roger_ver_get_rekt/" target="_blank" rel="noreferrer noopener">Reddit post</a> Wednesday, Ver claimed he has enough funds to pay Genesis, and even said he’d be “happy to pay,” but it’s Genesis that failed to hold up its end of the bargain.



“&#8230; Genesis was required by our agreement to remain solvent — as Genesis can’t ask its clients to play a ‘heads clients lose, tails Genesis wins’ game,” Ver wrote. He further claimed that he’d asked Genesis in June for assurances of its solvency, but didn’t receive what he wanted to know.



GGC International is a British Virgin Island company that facilitates crypto derivatives and spot trading, according to Genesis’ <a href="https://genesistrading.com/legal/regulatory-information" target="_blank" rel="noreferrer noopener">website</a>.&nbsp;



Genesis, itself a subsidiary of <a href="https://www.reuters.com/business/finance/who-is-barry-silbert-head-genesis-owner-dcg-2023-01-20/" target="_blank" rel="noreferrer noopener">Barry Silbert’s</a> crypto-conglomerate Digital Currency Group, <a href="https://blockworks.co/news/genesis-in-chapter-11-wont-insulate-silbert-winklevoss-says" target="_blank" rel="noreferrer noopener">filed for bankruptcy</a> last week, about two months after halting customer withdrawals and loan originations. But GGC International hasn’t filed for bankruptcy just yet.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">On the topic of <a href="https://twitter.com/hashtag/Genesis?src=hash&amp;ref_src=twsrc%5Etfw">#Genesis</a>: <a href="https://t.co/2a0fYu5P3E">https://t.co/2a0fYu5P3E</a> <a href="https://t.co/a6tA0HISMo">pic.twitter.com/a6tA0HISMo</a>&mdash; Roger Ver (@rogerkver) <a href="https://twitter.com/rogerkver/status/1618270413435568131?ref_src=twsrc%5Etfw">January 25, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Blockworks has reached out to both Ver and Genesis for comment.&nbsp;



While it’s unclear whether <a href="https://www.offshorealert.com/ggc-international-ltd-v-roger-ver-summons-with-notice-failure-to-settle-20m-expired-crypto-options/" target="_blank" rel="noreferrer noopener">courts</a> will compel Ver to cover the expired options, this isn’t the first time he&#8217;s been challenged on trading debt.



Last July, he was entangled with a smaller platform, <a href="https://blockworks.co/news/coinflex-takes-legal-action-to-recover-84m-from-single-customer" target="_blank" rel="noreferrer noopener">CoinFLEX</a>, after CEO Mark Lamb accused him of owing the company $47 million in USDC after he failed to meet a margin call.&nbsp;



CoinFLEX later filed <a href="https://blockworks.co/news/coinflex-ceo-files-default-notice-against-bitcoiner-roger-ver" target="_blank" rel="noreferrer noopener">legal action</a> in Hong Kong against Ver, saying its estimated losses from Ver’s refusal to pay the debt, which had nearly doubled to $84 million.&nbsp;



Ver denied owing CoinFLEX and instead alleged the now-bankrupt exchange actually left him out of pocket.



Updated Jan. 27, 2023 at 4:16 am ET: Added context in first paragraph.



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Roger Ver Says He Won’t Pay Genesis $20M For Bad Trades

<div id="highlights-block_6319a0f7648bd" class="highlights">
 <ul>
 <li>Voyager last said it was in active discussions with 22 interested parties, but didn’t name them</li>
 <li>FTX/Alameda, Binance and Coinbase have reportedly shown interest in the lender’s assets</li>
 </ul>
 
</div>



Voyager Digital will part with its remaining assets at an auction scheduled for next week, two months after <a href="https://cms.blockworks.co/voyager-files-for-bankruptcy-days-after-freezing-withdrawals/" target="_blank" rel="noreferrer noopener">filing for bankruptcy</a>. 



A <a href="https://cases.stretto.com/public/x193/11753/PLEADINGS/1175309072280000000008.pdf" target="_blank" rel="noreferrer noopener">court document</a> filed Tuesday showed the auction will take place on Sept. 13 at 10 am ET at the New York office of Voyager’s investment banker Moelis &amp; Company. The results will be announced at a court hearing on Sept. 29 at 2 pm ET. 



Holding an auction implies that Voyager received more than one substantial bid for its assets. Finalization of the best bidder would be the first step for customers to recover their funds locked on the brokerage’s platform.



In bankruptcy auctions, a debtor may decide to liquidate its debt by allowing external parties to bid on its possessions. The external parties view this as an opportunity to buy high-cost assets at a cheaper price. Post the auction, proceeds are generally meant to go to creditors.



Voyager’s lawyers have previously said <a href="https://cms.blockworks.co/bankrupt-voyager-higher-and-better-bids-than-ftx-low-ball-on-table/" target="_blank" rel="noreferrer noopener">88 interested parties</a> had reached out to the firm, but there may have been more after the deadline for bids extended from August 26 to Sept. 6. At the time, it was in active discussions with 22 parties. 



The lender hasn’t disclosed which parties have shown interest, but Sam Bankman-Fried made a joint offer via Alameda Ventures and FTX in late July. Voyager was quick to reject that proposal, describing it as a “low-ball bid dressed up as a white knight rescue.”



Binance is another major player in the industry that was interested in snapping up Voyager’s distressed assets, while Coinbase reviewed an offer but pulled out, according to <a href="https://www.coindesk.com/business/2022/08/25/binance-ftx-among-crypto-players-in-hunt-to-buy-voyager-digital-assets-as-coinbase-backs-out-sources/" target="_blank" rel="noreferrer noopener">CoinDesk</a>.



Aside from seeking a buyer, Voyager has been attempting to extricate customer funds. Last month, it got court clearance to <a href="https://www.wsj.com/articles/voyager-digital-to-return-270-million-to-customers-11659648633" target="_blank" rel="noreferrer noopener">return $270 million</a> to customers. Another $1.3 billion in digital assets on the company’s platform will be distributed among creditors during bankruptcy proceedings.



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Voyager To Liquidate Assets at Auction

Casey Wagner

<div id="highlights-block_630506f3a2cda" class="highlights">
 <ul>
 <li>Bankrupt crypto lender Celsius says Prime Trust returned some, but not all of its assets</li>
 <li>Prime Trust ended its professional relationship with Celsius in June 2021</li>
 </ul>
 
</div>



As Celsius’ bankruptcy proceedings inch forward, the crypto lender has filed a new lawsuit that aims to regain possession of $17 million of cryptoassets the beleaguered company claims it owns. 



In the <a href="https://www.docdroid.net/JerEtk7/cel-v-primtrust-pdf#page=2" target="_blank" rel="noreferrer noopener">complaint</a>, filed in a bankruptcy court for the Southern District of New York Tuesday, Celsius alleged crypto service provider Prime Trust failed to transfer crypto assets now worth $17 million. Prime Trust, among other services, provides digital asset custodial solutions to institutions. 



After working together for one year, Prime Trust ended its relationship with Celsius in June 2021, the complaint says. Prime Trust allegedly transferred around $119 million in cryptocurrency to Celsius, but has “failed and refused to transfer” the remaining funds, according to the complaint.&nbsp;



Prime Trust opted to remove Celsius from its platform “for a variety of business factors,” the enterprise provider said in a statement in June 2021.&nbsp;



“We won’t comment beyond that other than to wish Celsius well in its endeavors,” the company added.&nbsp;



Representatives from Prime Trust and Celsius did not immediately respond to requests for comment.&nbsp;

Celsius Alleges Prime Trust Owes $17M In New Lawsuit 

John Gilbert

<div id="highlights-block_62b1ea51bfd39" class="highlights">
 <ul>
 <li>Crypto lenders offer yields on crypto deposits, such as stablecoins, by lending them on interest — similar to traditional banking practices</li>
 <li>Crypto lending platforms are divided into two major categories: noncustodial (decentralized) and custodial (centralized)</li>
 </ul>
 
</div>



On June 13, 2022, Celsius investors woke up to an alarming <a href="https://blog.celsius.network/a-memo-to-the-celsius-community-59532a06ecc6">statement</a> from the crypto lending platform: “Celsius is pausing all withdrawals, swap, and transfers between accounts.”



For a platform that prides itself on its high returns without the problems of traditional finance, it left many asking, &#8220;How does crypto lending really work, and where did all the liquidity go?&#8221;



<h3>What is crypto lending, and how does it work?</h3>



Let&#8217;s start with the basics. On the face of it, crypto lending works the same as traditional banking, but for digital assets. Crypto lenders offer yields on crypto deposits, such as stablecoins, by lending them on interest. The key distinction is in the type of deposit and the type of lender.&nbsp;&nbsp;



There are two very different categories of crypto lending platforms: noncustodial (decentralized) and custodial (centralized). Noncustodial is a new approach, whereas custodial lending uses the traditional model with slight variation. Celsius is an example of the latter. To understand why problems crop up in the custodial lending model, we need to explain the differences in liquidity sourcing and collateralization requirements.&nbsp;&nbsp;&nbsp;



<h3>The categories of crypto loans explained&nbsp;&nbsp;</h3>



<h4 id="Custodial-Lending">Custodial (centralized) crypto lending</h4>



Custodial crypto lending looks and feels like a bank for cryptocurrencies — without the same regulatory oversight and consumer protections. It manages all deposits and loans on a centralized platform and internal balance sheet. Anyone who wishes to earn interest on their crypto savings sends their tokens to a custodial wallet address where they lose direct control of the asset. In return, the platform invests the assets at their discretion — whether through lending at interest or alternative <a href="https://cms.blockworks.co/what-is-yield-farming-what-you-need-to-know/" target="_blank" rel="noreferrer noopener">yield farming</a>.



<h4 id="Noncustodial-Lending">Noncustodial (decentralized) crypto lending</h4>



A noncustodial lending platform enables decentralized peer-to-peer or peer-to-pool lending. Unlike its traditional counterpart, it allows depositors (lenders) to maintain ownership of their tokens — and the source of yield is clear. Lenders earn interest and borrowers pay interest. Platforms can automate functions traditionally managed by banks or custodians using blockchain smart contracts.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



<h3 id="Crypto-Liquidity">Crypto liquidity defined</h3>



Crypto liquidity, like in traditional markets, is the efficiency with which any digital asset can be converted into cash or token equivalent — without affecting the market price. Think of total asset liquidity as a pool of water, and asset price as the water level. The larger the pool, the slower the level changes.



Equity markets traditionally measure liquidity in cash, but crypto markets measure it across an ever-growing list of token pairs. This web can be hard to follow, but doing so is critical to understanding how crypto lending platforms maintain liquidity.



<h3>Where and how crypto lending platforms source liquidity&nbsp;</h3>



<h4 id="Noncustodial-Lending">Noncustodial (decentralized) crypto lending</h4>



Decentralized crypto lenders, such as Aave, source liquidity through a network of different liquidity pools. So instead of lenders and borrowers setting the terms of their peer-to-peer loans, the protocol works by using automated smart contracts to set the interest rates of each pool.&nbsp;



Aave’s liquidity pool protocol aims to incentivize outside lenders to keep the pools liquid and borrowing functional.&nbsp;



For example, if an ether (ETH) pool is low in liquidity, then these smart contracts will automatically increase the interest rates to attract lenders to that pool and encourage borrowers to repay their loans. When lenders add ETH, they receive Aave&#8217;s token equivalent in the form of aETH. This asset is different from a <a href="https://cms.blockworks.co/wrapped-crypto-tokens-and-why-theyre-critical-to-markets/">wrapped token</a> because there is no central custodian. Smart contracts hold ETH deposits and automatically reward the lender with loan interest.&nbsp;



<h4 id="Custodial-Lending">Custodial crypto (centralized) lending</h4>



In contrast, centralized crypto lenders such as Celsius source liquidity from their centrally controlled pool of total deposits. They manage interest rates and approve loans on a case-by-case basis. Unlike decentralized noncustodial lenders, centralized lenders return yields from various sources outside of interest payments. For example, Celsius invests customer deposits in something called liquid staking.&nbsp;



<h4 id="Liquid-Staking">Liquid staking (stETH)&nbsp;</h4>



Because staking ETH on Ethereum’s Beacon Chain locks the ETH until a future date — not yet fixed but expected to be mid-2023 — after the <a href="https://cms.blockworks.co/shadow-forks-and-testnets-the-ethereum-merge-approaches/" target="_blank" rel="noreferrer noopener">Merge</a>, Lido Finance offers stETH, a liquid derivative for ETH holders interested in staking rewards. The token allows holders to accrue staking rewards but maintain flexibility to sell or transfer the asset. If they exchange the token with someone else, the new owner can claim future staking rewards. Nansen Research reported that Celsius owns a wallet holding over <a href="https://apeboard.finance/dashboard/0x8aceab8167c80cb8b3de7fa6228b889bb1130ee8">$450 million</a> in stETH.



<h3>Differences in crypto lending collateral requirements</h3>



Crypto collateral is a borrower&#8217;s pledge of tokenized assets or currency to a lender — in the case they cannot repay their loan. The borrower retains ownership of collateral as long as the loan is paid back with interest.&nbsp;



Traditional banking typically requires a small fraction of the loan as collateral and utilizes borrower credit scores to gauge lending risks. Because crypto lending prides itself on providing fast credit with no minimum credit score, it requires liquid collateral so that it can automate liquidations. So instead of using your house as collateral, you would need to use stablecoins, or other cryptoassets — although perhaps in the future, it will be easier for anyone to tokenize property. Because crypto markets are exceptionally volatile, lenders require a lower loan-to-value (LTV) ratio (not to be confused with total value locked, or TVL).



I know, it&#8217;s a lot to take in — so let&#8217;s review:



LTV — A loan-to-value ratio is the proportion of a loan&#8217;s value represented by the collateral. A 100% LTV ratio is a 1:1 ratio, meaning the borrower puts up the full value of the loan as collateral.&nbsp;



TVL — Total value locked is the total value of cryptocurrency locked in a smart contract and represents the health and liquidity of any decentralized exchange or crypto lending protocol.



Both crypto lending categories require high LTV, but they differ in how they measure, report and force liquidations.&nbsp;&nbsp;



<h4>Custodial crypto (centralized) lending</h4>



Centralized lending can use a variety of methods to monitor LTV. If a borrower&#8217;s LTV drops below the safety threshold, the centralized lender will warn the borrower that a portion of their collateral is at risk of liquidation through a margin call. If the value continues to drop, the lender will automatically trigger a partial or total liquidation of the borrower&#8217;s collateral.



But with centralized lending, this collateral requirement doesn&#8217;t directly protect depositors. Because centralized lenders shuffle deposits between various investments like stETH and stablecoins such as Tether (USDT), depositors have little insight into the total liquidity available on a centralized platform.



Celsius’ announcement suspending withdrawals on Jun. 13, 2022, increased selling pressure on stETH, pushing the price further below the price of ETH. Many speculated that this divergence is what prompted Celsius to freeze accounts. But because their total liquidity value isn’t public, there is no way of evaluating what triggered the fear.&nbsp;



<h4>Noncustodial (decentralized) crypto lending</h4>



Decentralized lending, on the other hand, is fully transparent. Any liquidity provider can look up a platform&#8217;s TVL to measure total liquidity and overall health. There are no alarming tweets signaling that the core team suspended withdrawals. There are oracle pricing and smart contract risks, but decentralized lending, in principle, isn&#8217;t exposed to the risks of a centralized custodian.



For example, when a lender deposits ETH into an Aave ETH liquidity pool, smart contracts make the liquidity exclusively available for ETH borrowers. No central entity can scoop up the deposit and gamble with it off-chain.&nbsp;



Blockchain price oracles constantly monitor the LTV ratios of each borrower so that if there is a risk of default, the protocol automatically liquidates the collateral to protect the lender.&nbsp;



<h3>Crypto Lending Liquidity Risks</h3>



Both lending categories contain liquidity risks. In decentralized lending, price oracles can fail during market-wide liquidity crunches — exposing liquidation to price slippage and causing lenders to recoup only a portion of their deposit. And in centralized lending, central actors can invest customer deposits on leverage with the risk of draining too much liquidity from the platform.&nbsp;



In fact, the liquidity problems of one side of the crypto lending world will often hurt the other. This contagion results from a complex interplay between wrapped tokens, staked ETH and stablecoins on decentralized exchanges such as Curve Finance.&nbsp;&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>



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This article was corrected to say &#8216;lenders require a lower loan-to-value (LTV) ratio&#8217; instead of a higher LTV. In DeFi, lower LTV signifies stricter collateral requirements. 



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Where’s the Liquidity? Crypto Lending Explained

Jocelyn Yang

<div id="highlights-block_62ac9d8ecaed5" class="highlights">
 <ul>
 <li>Bank of International Settlements’ economists said current DeFi loans don’t finance real economy activities</li>
 <li>Total value locked in DeFi lending protocols reached $50 billion in early 2022, up from nearly zero at the end of 2020, according to BIS data</li>
 </ul>
 
</div>



The recent Terra LUNA collapse and <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius’ restrictions on withdrawals</a> have sparked fears of a crisis in crypto lending. Economists at the <a href="https://www.bis.org/publ/bisbull57.pdf" target="_blank" rel="noreferrer noopener">Bank of International Settlements</a> (BIS) said while on-chain collateral in DeFi lending overcomes asymmetric information, it doesn’t make the space immune from boom-bust episodes, compounded by liquidation spirals. 



Cryptocurrency lending platforms — where borrowers can deposit cryptoassets as collateral to secure a loan from the lenders — are critical to the DeFi (decentralized finance) ecosystem, according to the institution’s bulletin released this week. However, BIS economists found these platforms’ institutional features mostly “facilitate speculation in cryptoassets” rather than “real-economy lending.”&nbsp;



“Smart contracts assign each collateral type a haircut, or margin, that determines the minimum collateral borrowers must pledge to receive a loan of a given amount. The high price volatility of cryptoassets means that there is overcollateralization: the collateral required tends to be much higher than the loan size,” the bulletin read.&nbsp;



“As DeFi loans are disbursed in cryptoassets and secured by crypto collateral, they do not currently finance real economy activities,” it added.&nbsp;



Meanwhile, BIS economists believe that the need for collateral blocks the fundamental goal of DeFi: “democratizing finance.” Those not so asset-rich are often excluded when it comes to accessing financial services.&nbsp;



“Due to the anonymity of borrowers, overcollateralization is pervasive in DeFi lending,” the report read. “Reliance on collateral also limits access to credit to borrowers who are already asset-rich, negating financial inclusion benefits.”



As high returns attract investors, the total value locked in DeFi lending protocols reached $50 billion in early 2022, up from nearly zero at the end of 2020, according to BIS.&nbsp;



Now that trend has reversed — total value locked <a href="https://defillama.com/chains" target="_blank" rel="noreferrer noopener">has plummeted</a> along with asset prices.



<h3>Is it collateral or opaqueness that’s the problem?</h3>



It’s not surprising that a champion of central banks would dismiss the concept of decentralization. But Chase Devens, research analyst at Messari, argues centralization is largely responsible for the current mess, noting that it was poor risk-management mixed with a lack of understanding of asset and protocol functions — such as Terra and stETH — that left large centralized players such as Celsius searching for liquidity.&nbsp;



“The falling dominoes have been fueled by a lack of transparency as to how much leverage was built up within the system,” Devens said.



<blockquote class="wp-block-quote">“As we know, the state of DeFi is publicly verifiable and allows the health of the system to be assessed in real time. However, [over-the-counter] deals and off-chain leverage can build up beyond this ecosystem and trigger surprise liquidation cascades as they are unraveled.” </blockquote>



If DeFi lending wants to make it into the real-world economy, BIS economists suggested it must engage in “large-scale tokenisation of real-world assets” and rely less on crypto collateral. However, “developing its ability to gather information about borrowers,” would eventually lead the system to “gravitate towards greater centralization.”&nbsp;&nbsp;



“The similarities between DeFi and legacy intermediaries are increasing, which has two important implications,” the report read. “The first is that elements of DeFi, mainly smart contracts and composability, could find their way into traditional finance. The second implication is that, once more, decentralization proves to be an illusion.”&nbsp;



Devens agreed that large-scale tokenization has always been a goal for DeFi. Yet, he thought abandoning anonymity and relying on centralization might not be the best strategy over the long term because “centralized entities have proven to be opaque and create bottlenecks of their own,” he said, pointing once more at Celsius.&nbsp;



“Although the identities of the borrowers are (mostly) unknown, we know exactly what price levels will trigger liquidations from on-chain lending protocols such as Maker or Aave,” he said.&nbsp;



<blockquote class="wp-block-quote">“As zero-knowledge technology continues to improve in the coming years, identity and reputation-based lending systems will have room to flourish.”</blockquote>



Protocols such as MakerDAO are <a href="https://forum.makerdao.com/t/aggressive-growth-strategy/13958" target="_blank" rel="noreferrer noopener">specifically focusing</a> on onboarding real-world assets to expand the collateral base of DAI and, by extension, all of DeFi.



“The evolution of crypto will continue to play out for many years to come and ultimately result in an antifragile system that is anchored on decentralization at its core,” he added.



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‘Decentralization Proves To Be an Illusion,’ BIS Says

Bessie Liu

<div id="highlights-block_62ab749cc4df7" class="highlights">
 <ul>
 <li>Celsius froze withdrawals of user assets earlier this week, citing market conditions</li>
 <li>Regulators want to ensure incidents like this do not occur again</li>
 </ul>
 
</div>



Five state regulators have opened investigations into the dealings of Celsius, the cryptocurrency lender now in limbo after suddenly freezing withdrawals due to “extreme” market conditions.&nbsp;



The Texas State Securities Board unveiled its probe into the company’s activities on Thursday.&nbsp;



Four states — Alabama, Kentucky, New Jersey and Washington — are set to join Texas, <a href="https://www.reuters.com/markets/us/exclusive-texas-securities-regulator-is-probing-celsius-account-freeze-official-2022-06-16/" target="_blank" rel="noreferrer noopener">Reuters reported</a>.&nbsp;



Officials had been investigating the matter since Monday morning and the situation has been considered a “priority.”



The crypto industry has been under scrutiny since the collapse of the stablecoin UST, which sent shockwaves across the market after it wiped out <a href="https://cms.blockworks.co/how-cryptoasset-markets-have-changed-since-terra-crash/" target="_blank" rel="noreferrer noopener">billions of dollars</a>. This is the second major blow in as many months, leaving digital assets traders, service providers and investors under mounting duress.&nbsp;



Unlike traditional financial institutions, cryptocurrency lenders are not subject to many risk management and capital disclosures. Their deposits are not government-backed or otherwise insured.&nbsp;



It’s not the first time that Celsius has made its way into the forefront of regulators&#8217; radars. In September last year, Celsius was given a <a href="https://www.nj.gov/oag/newsreleases21/Celsius-Order-9.17.21.pdf" target="_blank" rel="noreferrer noopener">cease and desist letter</a> by state regulators in Alabama, New Jersey and Texas ordering that its products needed to be registered as securities.



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5th Regulator Investigates Beleaguered Crypto Lender Celsius

David Canellis

<div id="highlights-block_62a8e9e6b31d4" class="highlights">
 <ul>
 <li>“Macro is driving problems with Celsius rather than Celsius driving problems for the market,” Arca’s Dorman said</li>
 <li>Scaramucci is still long-term bullish but warned crypto investors must stomach current volatility</li>
 </ul>
 
</div>



Crypto markets are squarely in the toilet. Bitcoin is trading around $22,000 — almost 70% below its November all-time high. Ether, somehow, has fared even worse.



Collapsing lending platform Celsius makes for an easy scapegoat for the widespread carnage. Rumors of its insolvency preceded Celsius&#8217; native token, CEL, dumping 50% this month. The platform has since <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">locked</a> users out of their accounts while it wrangles various leveraged decentralized finance (DeFi) positions.



Just weeks ago, markets reeled from the Terra ecosystem’s <a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">implosion</a>, which all but wiped out the ninth and 10th largest tokens by market capitalization and some $40 billion in representative value along with it.&nbsp;



But macroeconomic factors such as inflation, rate hikes and the war in Ukraine have pushed the tech-heavy Nasdaq and the broader S&amp;P 500 down 30% and 20%, respectively, this year as the US flirts with a recession. Commodities, meanwhile, are surging, with benchmark index S&amp;P GSCI up more than 40% year to date.&nbsp;



It’s clear investors are moving from “risky” assets such as crypto and tech stocks into more recession-resistant plays.&nbsp;



It all presents a classic chicken-and-egg problem: Did Celsius trigger cryptocurrency to shed more than 25% from its collective value over the past week, or are investors simply de-risking across the board?



<h3>The Great De-risking</h3>



Anthony Scaramucci, managing partner at hedge fund of funds SkyBridge Capital, told Blockworks he wasn’t surprised by sinking crypto prices. SkyBridge offers an institutional bitcoin fund, as well as other vehicles designed to offer limited partners crypto exposure.&nbsp;



“You have a risk-off market, an oil crisis born from the current war environment, and you have the vestiges of the pandemic,” Scaramucci said. “As well, we may not be feeling it as much in Europe and the United States, but they&#8217;re going through ‘zero Covid’ lockdown strategies in China, and that&#8217;s having a huge effect on the supply chain.”



The precarious macro landscape — combined with too much money in traders’ pockets as a result of US stimulus measures — has led to big inflation numbers, according to Scaramucci, causing correlation across multiple asset classes, as with tech stocks and bitcoin.&nbsp;



“Bitcoin, in a buoyant market, goes up more than the market,” he said. “In a downtrodden, depressed market, it&#8217;s going to go down more.”



The financier posited rising inflation is not likely systemic or secular, but born directly from the aforementioned ongoing crises.&nbsp;



“A year from now, we could very well be out of the pandemic, and the inflation numbers could actually trend down,” added Scaramucci, who this week <a href="https://twitter.com/SquawkCNBC/status/1536314248539815936" target="_blank" rel="noreferrer noopener">told</a> CNBC that SkyBridge had just bought more bitcoin and ether. “The future of the web is going to include these decentralized technologies — I&#8217;m incredibly long-term bullish. You just have to have the stomach for this level of volatility right now.”



<h3>Macro factors exposed unsustainable digital assets</h3>



Jeff Dorman, chief investment officer at crypto investment firm Arca, said the dampened macro environment has driven some participants to take on additional risk.&nbsp;



“I think macro is driving problems with Celsius, rather than Celsius driving problems for the market,” Dorman said. “If Bob gives me one bitcoin, (BTC) and I pay him 2% interest for that, and then I lend it to Alice, who pays me 3% — that’s easy. I have a one-for-one asset liability match. And I’m making 1% net interest margin on the spread,” Dorman said.



Problems arise when Bob gives five BTC, but Alice only wants to borrow one. The lender still has to pay Bob 2% on his five BTC while Alice is only paying the lender 3% on one.



“Now, I have to figure out how to make up that yield,” Dorman said. “So, what am I going to do? I&#8217;m gonna go do risky hedge fund shit to make up that yield and hope that nobody knows what I&#8217;m doing — because nobody&#8217;s paying attention, because it&#8217;s unregulated. That’s where these companies get in trouble: They&#8217;re basically operating like unregistered hedge funds.&#8221;



But Dorman rejected the current zeitgeist that demands investors lump all digital assets together to consider them one giant risk trade, with bitcoin the least risky, outside of stablecoins.



Believing that bitcoin is king and everything else is an altcoin is an “archaic way of thinking about this market,” he said, the equivalent of labeling the S&amp;P 500 the only ETF and everything else a lesser, alternative ETF.



Crypto investors might wonder: Absent an exit from digital asset markets entirely, what does de-risking look like?



<h3>Defensive digital assets</h3>



Of course, there are stablecoins, some riskier than others. (SkyBridge’s Scaramucci said Circle’s USD Coin and Tether held up remarkably well throughout the recent chaos, with both firms processing billions of dollars worth of redemptions without downtime.)



Scaramucci suggested investors stay away from leverage, saying: “Stay unlevered. Be long term in your orientation. What&#8217;s caused the upside surprises and the downside surprises is the leverage in the system.”



To Arca’s Dorman, persistent price correlation in crypto is the result of an immature investor class, rather than anything inherent to digital assets.



“In theory, bitcoin has nothing to do with Axie Infinity, which has nothing to do with BNB,” Dorman said. “But if one guy owns all three, and they&#8217;re using those three as collateral to do something, they&#8217;re going to be a forced seller of all three at the same time.”



Crypto exchange tokens should be resistant to market downturns in a mature market (there’s been some <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/" target="_blank" rel="noreferrer noopener">indication</a> already), while native assets for blockchain-powered games should even <a href="https://cms.blockworks.co/crypto-markets-have-tanked-but-not-blockchain-based-gaming/" target="_blank" rel="noreferrer noopener">prove resilient</a> during a recession, Dorman said — as long as the tokens are structured with sustainability in mind.



“In the digital asset world, what are the areas where investors won&#8217;t stop what they&#8217;re doing just because of a bad market or because of a recession? Gamers don&#8217;t stop gaming because of recession,” he said. “If anything, they actually start gaming more, because they have more time on their hands and they&#8217;re not working. Gaming, in theory, should be a defensive sector.”



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Did Macro Kill Crypto or Are Risk-laden Lenders to Blame?

<div id="highlights-block_62a760b53a9ee" class="highlights">
 <ul>
 <li>It’s been clear for some time that Celsius was having difficulties meeting withdrawal obligations, Nexo told Blockworks</li>
 <li>Celsius’ withdrawal freeze is the rollercoaster that crypto fans have signed up for, one exec said</li>
 </ul>
 
</div>



It wasn’t a fun start to the week for cryptocurrency enthusiasts. <a href="https://cms.blockworks.co/crypto-total-market-capitalization-under-1t-after-10-fall/" target="_blank" rel="noreferrer noopener">Prices fell</a> across the board and well-known crypto lender Celsius announced it would <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">pause withdrawals</a> indefinitely.&nbsp;



But rival Nexo wasn’t surprised by the firm’s message — it even <a href="https://twitter.com/Nexo/status/1536256598993211393?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1536256598993211393%7Ctwgr%5E%7Ctwcon%5Es1_&amp;ref_url=https%3A%2F%2Fcms.blockworks.co%2Fcelsius-lending-platform-suspends-withdrawals-and-transfers%2F" target="_blank" rel="noreferrer noopener">pitched</a> acquiring some of Celsius’ distressed assets just hours after its worrying announcement frustrated customers.&nbsp;



On June 13, Nexo said on Twitter it had extended a <a href="https://twitter.com/Nexo/status/1536256598993211393" target="_blank" rel="noreferrer noopener">formal offer</a> to buy assets from Celsius. The crypto lending firm told Blockworks it was already aware of Celsius&#8217; looming troubles.



“As a major participant in the [over-the-counter] interbank digital asset markets, Nexo is naturally close to all that is happening in the space,” a Nexo spokesperson said.&nbsp;



“From the publicly available on-chain data and client reports, it has been clear for some time that Celsius is having difficulties meeting the withdrawal obligations. From a risk management perspective, our findings have pointed to the unsustainability of Celsius.&#8221;



Nexo reached out to Celsius on Sunday to see how it could help in liquidity provision, but “they claimed there is no need and refused our help,” the spokesperson said. This led Nexo to submit a formal offer on Monday, which it shared publicly.



When asked what led Nexo to immediately offer to buy up Celsius’ assets, the Zug-based firm reiterated it just wants to look out for crypto investors.&nbsp;



“Timing is of the essence because, ultimately, Nexo’s main concern is protecting the interests of crypto users in this unfortunate situation,” Nexo said. “As events develop, the company hopes Celsius will accept this help and as few investors will be affected adversely as possible.”



As of press time, Nexo said it hadn’t yet received a response from Celsius about its formal offer.



Celsius offers high interest to customers for token deposits, which it lends out to other crypto companies to earn a return. From a regulatory point of view, the business of crypto lending is still obscure.&nbsp;



The network, headed by chief executive Alex Mashinsky, had about $12 billion in assets under management as of May and bills itself as both a decentralized finance (DeFi) and centralized finance lender.



“This is the issue with Celsius — it’s not inherently transparent with an open ledger. It’s run by centralized actors, and you have to basically trust the custodians of the platform,” Valour CEO Russell Starr said.



“DeFi is the opposite. If anything, I see this event as a long-term call for strengthening DeFi protocols.”



The “extreme market conditions” that Celsius cited as the reason for its withdrawal freeze seemed to have spread to <a href="https://cms.blockworks.co/crypto-total-market-capitalization-under-1t-after-10-fall/" target="_blank" rel="noreferrer noopener">crypto exchange Binance</a>. Industry commentators pointed out that the twin incidents might amplify investor anxiety about the market in the coming days, causing further fallout.



“Investors are clearly worried of a situation that would be similar to the Luna crash,” said Walid Koudmani, chief market analyst at financial brokerage <a href="https://www.xtb.com/en" target="_blank" rel="noreferrer noopener">XTB</a>, adding that regulators are already closely scrutinizing crypto financial products with high returns on passive investments.



“The situation with the Celsius network could be an omen of what&#8217;s to come in the near future as regulators begin to pay closer attention and as investors become more sceptical of such projects and the sector as a whole,” he said.



But others suggested any early-stage sector will go through rocky patches before calm sets in.



“If you’re in crypto, this event unfolding with Celsius is the rollercoaster you’ve signed up for,” said Garry Krugljakow, CEO at DeFi protocol GOGO Protocol. “It’s painful for some and could get even more painful if there are other blow-ups that end up happening as well – which is certainly possible – but this is the nature of this emergent market.”



Celsius didn’t immediately respond to a request for comment by Blockworks.



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