Celsius Withdrawal Halt Reveals Run Risks on Other Crypto Banks

key takeaways

Celsius announced on Sunday evening that it would be pausing withdrawals, swaps and transfers between accounts on its platform due to “extreme market conditions”
Industry members are calling the situation a run, and it can happen to others in the space

As cryptocurrencies and related equities continue to tumble, industry participants are questioning how the crumbling of crypto lending platform Celsius might impact digital asset markets elsewhere.

“Certainly we could see some contagion,” Rasheed Saleuddin, head of research at Blockworks, said. “Transparency is key in shadow banking markets.”

Celsius, sometimes referred to as a quasi-bank because it straddles the line between decentralized and centralized finance, said on Sunday it would pause withdrawals, swaps and transfers between accounts on its platform due to “extreme market conditions.”

“We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations,” the firm wrote in a blog post.

The company said its decision to pause withdrawals was essential to “stabilize liquidity and operations.”

Monday morning, crypto exchange Binance paused bitcoin withdrawals for about three hours as markets continued to reel from Celsius. Binance attributed the suspension to “minor hardware failures” that caused transactions to backlog, according to a tweet.

“We’ve seen a lot of transactions, and we’re nowhere near the size of Binance,” said Chris Kline, chief operating officer and co-founder of Bitcoin IRA. “We have a couple billion dollars — they’ve gotten almost a trillion, but you can imagine what happens, the technology really gets pushed to the limit, and it’s a stress test on your system.”

Runs can stress any financial system, Kline added.

“Just like if this was happening in stocks, there’d be houses like Fidelity, TD Ameritrade, etc., having problems with too many people in the system,” Kline said. “Too many people doing things causes backlogs.”

What is happening to Celsius and what happened to Terra’s UST in May are runs, Saleuddin said, and there is no telling which other companies could be impacted.

“Is BlockFi at risk? Nexo? It depends how liquid they are,” Saleuddin said.

Fellow quasi-bank Tether attempted to distance itself from Celsius in a blog post Monday.

“While Tether’s investment portfolio does include an investment in the company, representing a minimal part of our shareholders equity, there is no correlation between this investment and our own reserves or stability,” the lending platform said.

Because its disclosures are vague, it’s impossible to know exactly how risky Tether’s assets are, Saleuddin said.

“But we do know they hold tokens, precious metals, a decent amount of low-grade commercial paper, and are exposed to Celsius,” Saleuddin said. “What would it take for a run on Tether? The truth is that we don’t know.”

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.