Collapsing cryptocurrency prices and liquidity concerns led US cryptocurrency lender Celsius Network to block user withdrawals on Monday, as Australian lawmakers attempt to make sense of the regulatory grey areas faced by local crypto asset providers and investors.
Unlike ‘traditional’ cryptocurrency exchanges that allow users to buy, sell, and trade digital assets, Celsius offers cryptocurrency loans and pays interest on cryptocurrency deposited to its Earn product.
Celsius markets Earn as a competitor to traditional bank deposits, which have offered minimal interest rates to account holders over the past few years. One Earn offering claims to provide returns of nearly 19% per annum.
Celsius claims to have 1.7 million users. In its FAQ section, Celsius says, “don’t worry, whatever the amount you need to have access to, you’ll be able to”.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
But Celsius yesterday declared that “extreme market conditions” have forced it to pause “all withdrawals, Swap, and transfers between accounts”.
“We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations.”
The “extreme” conditions in question refer to crumbling cryptocurrency prices.
Celsius offers interest rates of up to 6.50% on Bitcoin staked in its Earn system, but the underlying market value of Bitcoin has plummeted by 25% in the past five days alone.
The value of CEL, the in-house crypto asset powering much of the Celsius system, traded at around US$0.27 on Tuesday morning, representing a 50% decline in value over the past week.
Celsius traders hoping to withdraw their holdings or redeem them for fiat currency are now blocked from doing do.
“We are taking this necessary action for the benefit of our entire community in order to stabilise liquidity and operations while we take steps to preserve and protect assets,” the company said in a statement.
Celsius lock-out highlights gaps in Australian regulation
The Celsius crisis reflects the growing sense of urgency among Australian industry participants and lawmakers, who are attempting to hash out regulatory guardrails in the emerging digital economy.
Unlike traditional lenders, which must meet liquidity requirements under federal law, cryptocurrency lending services are not required to meet the same level of scrutiny.
As crypto asset deposits are not treated the same way as bank deposits, Australian investors can also be left high and dry if an exchange goes bust.
While many investors have flown high on expanding cryptocurrency values in the months leading to early 2022, the high-profile collapse of local outfits like MyCryptoWallet have put regulators on alert.
In October last year, the Senate Select Committee into Australia as a Technology and Financial Centre published a report with 12 key recommendations for crypto regulation, including a formal market licensing regime for digital asset exchanges.
Treasury last month closed submissions to its discussion paper on the shape of that proposed licensing regime, which covers crypto asset secondary service providers (CASSPrs).
The paper states any regulatory framework should consider the “operational risks” facing CASSPrs, “including business continuity, illiquidity and inadequate capital” — the precise issues that appear to be plaguing Celsius.
Further Treasury consultation is expected later in 2022. For now, investors and regulators will keep their eyes on the declining market, and industry participants feeling the brunt of falling prices.