Celsius ‘Deeply Insolvent’, US State Regulator Believes

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Vermont regulator warns crypto lending firm Celsius “lacks the assets and liquidity to honour its obligations to account holders and other creditors”

A US state financial regulator has effectively declared a major US cryptocurrency lending company Celsius Network insolvent.

Vermont’s Department of Financial Regulation (DFR) on Tuesday warned it believes cryptocurrency lender Celsius Network is “deeply insolvent and lacks the assets and liquidity to honour its obligations to account holders and other creditors.”

The warning comes after Celsius Network last month froze all withdrawals, swaps, and transfers between customer accounts, citing “extreme” conditions.

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Celsius troubles

Celsius, which with a value of $12bn is one of the biggest crypto lending platforms, allows users to lend out their tokens as collateral for other crypto projects in exchange for annual yields of up to 17 percent.

But investor interest in such high-risk areas has dropped off since the collapse of the TerraUSD “stablecoin” in early May, which along with the Luna coin was linked to a similar high-yield scheme.

Celsius said last month it was pausing all withdrawals, transfers and swaps after weeks of speculation around the sustainability of its large returns.

The company’s business model, like that of Terra, in which it was an investor, depends upon a steady flow of new entrants feeding the system, or borrowing to pay the high rates.

Following Terra’s collapse, some critics likened the business model to a pyramid scheme.

And now Vermont’s DFR has weighed in on the firm, which is unlicensed in Vermont but does sell to investors in the US state.

It said that Celsius freezing all withdrawals and transfers impacted hundreds of thousands of customers and billions of dollars of cryptocurrencies, including accounts of some Vermonters.

“Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities,” DFR alleged. “Celsius compounded these risks by using customer assets as collateral for additional borrowing to pursue leveraged investment strategies.”

“Additionally, some of the assets held by Celsius are illiquid, meaning they may be difficult to sell, and a sale may result in financial losses,” said DFR. “The company’s assets and investments are probably inadequate to cover its outstanding obligations.”

Insolvent lender?

And DRF warned that Celsius is very likely insolvent.

“Celsius Network has been operating in multiple jurisdictions, including in Vermont,” said DFR. “The Department believes Celsius has been engaged in an unregistered securities offering by offering cryptocurrency interest accounts to retail investors. Celsius also lacks a money transmitter license. This means that until recently, Celsius was operating largely without regulatory oversight.”

“Due to its failure to register its interest accounts as securities, Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,” it added.

“The Department has joined a multistate investigation of Celsius arising from the above concerns,” it said. “Previous representations made by the Company, its CEO, and other Celsius representatives about the safety of customer funds and the company’s ability to meet withdrawal obligations are untrue.”

“The Department is aware of reports that Celsius has consulted with insolvency counsel and is considering a bankruptcy filing,” it added. “If you are a Celsius customer, a bankruptcy filing could affect your investor rights and the value of your Celsius interest account balances. You should consult your own counsel if you have questions about your individual situation and how a bankruptcy proceeding could affect your investment in Celsius.”

It is reported that state securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington are investigating Celsius’s decision to suspend customer redemptions.