Posted: April 24th, 2025

Case 2 – Crypto Winter Buries Celsius Network and Batters DeFi

Respond 2 questions in 300-400 words:

Why is Anchor in trouble? What was Anchor’s business model?
What are Tether (USDT) and TerraUSD (UST)? How do they work, and what role do stablecoins play in the crypto ecosystem? What role did stablecoins play in the collapse of Celsius?

The Case Study is attached and make sure any AI is used.

Use the case as your absolute main resource, along with supplemental materials if provided. Your answers should be primarily based on the case. Quote the case precisely to demonstrate thorough reading and analysis. Be specific by referencing the page and section. This ensures you read the case carefully rather than relying on external information. Do not list the case or the supplemental material itself as a reference, as it will trigger the plagiarism tool. You can use external resources and reference them at the end, but your arguments should not be structured around them to stay on subject.

Example of Proper Quoting:

If answering question 1, you should reference specific sections of the case like this: “According to this section on Celsius’s business model, the main issue that led to its collapse was [specific detail](page number)”

UV8663
Feb. 14, 2023

Crypto Winter Buries Celsius Network and Batters DeFi

Celsius is going after all the money in the world.

—Alex Mashinsky, Celsius Network Ltd. Founder and CEO1

In June 2022, major cryptocurrency (crypto) lender Celsius Network Ltd. (Celsius) froze the accounts of
its 1.7 million clients, sending shockwaves across the burgeoning and largely unregulated decentralized finance
(DeFi) industry. Cryptos were in a free fall, and Celsius’s clients had made withdrawals at a rate that mirrored
a bank run. The consequences were disastrous; on July 14, Celsius filed for Chapter 11 bankruptcy protection.
Assets under management (AUM) were under $200 million, an unimaginable drop from October 2021 when
the firm’s AUM were $25 billion.2 At the time of the bankruptcy filing, Celsius owed its clients nearly $5 billion.3

Decentralized Finance

DeFi was a new and disruptive vision of banking and financial products and services—such as payments,
lending, borrowing, trading and investments, capital raising, and insurance—conducted without a trusted
central authority (e.g., bank, brokers, and stock exchanges).4 Instead, DeFi relied primarily on Ethereum
blockchain technology (ledgers connected by a network of computers) to record and share data. It used smart
contracts—self-executing software—to record transactions and transfer funds. Smart contracts were used to
create decentralized applications (dApps) that provided financial products and services. Smart contracts were
“if-then” statements between two parties and were not without their risks. “Smart contracts introduce an
additional risk that does not exist in most text-based contractual relationships—the possibility that the contract
will be hacked or that the code or protocol simply contains an unintended programming error,” wrote lawyers.
“Given the relative security of blockchains, these concepts are closely aligned; namely, most ‘hacks’ associated
with blockchain technology are really exploitations of an unintended coding error.”5

Alex Moskov, “Crypto Interest Account Pioneer Alex Mashinsky and Takes on Big Finance,” Coin Central, May 25, 2020,
https://coincentral.com/crypto-interest-account-pioneer-alex-mashinsky-and-takes-on-big-finance/ (accessed Sept. 14, 2022).

2 MacKenzie Sigalos, “ From $25 Billion to $167 Million: How a Major Crypto Lender Collapsed and Dragged Many Investors Down with It,” CNBC,
July 18, 2022, https://www.cnbc.com/2022/07/17/how-the-fall-of-celsius-dragged-down-crypto-investors.html (accessed Sept. 13, 2022).

3 https://www.cnbc.com/2022/07/17/how-the-fall-of-celsius-dragged-down-crypto-investors.html.
4 Francesca Carapella et al., “Decentralized Finance (DeFi): Transformative Potential and Associated Risks,” Finance and Economics Discussion

Series 2022-057 (Washington, DC: Board of Governors of the Federal Reserve System, 2022).
5 Stuart D. Levi and Alex P. Lipton, “An Introduction to Smart Contracts and Their Potential and Inherent Limitations,” Harvard Law School Forum

on Corporate Governance, May 26, 2018, https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-
inherent-limitations/ (accessed Nov. 1, 2022).

This public-sourced case was prepared by George (Yiorgos) Allayannis, Robert F. Bruner Distinguished Professor of Business Administration, and Aldo
Sesia, Senior Case Researcher. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative
situation. Copyright  2023 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email
to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the
highest quality, so please submit any errata to editorial@dardenbusinesspublishing.com.

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This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

mailto:editorial@dardenbusinesspublishing.com

mailto:sales@dardenbusinesspublishing.com

https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and

https://www.cnbc.com/2022/07/17/how-the-fall-of-celsius-dragged-down-crypto-investors.html

Celsius Network CEO Alex Mashinsky: Interview 202

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Governance tokens were used to establish decentralized governance on a blockchain project. They gave
holders a vote in how the project was run. Projects used various calculation methods to award their governance
tokens to their stakeholders (e.g., founders, investors, and users). Generally, smart contracts tabulated the votes
of token holders.

Advocates of DeFi believed it would solve problems with traditional centralized finance including
inefficiency, limited access, and opacity, among others. Scholars wrote,

A centralized financial system has many inefficiencies. Perhaps the most egregious example is the credit
card interchange rate that causes consumers and small businesses to lose up to 3% of a transaction’s
value with every swipe due to the payment network oligopoly’s pricing power…Today, 1.7 billion
people are unbanked making it very challenging for them to obtain loans and to operate in the world of
internet commerce. Further, many consumers must resort to pay-day lending operations to cover
liquidity shortfalls. Being banked, however, does not guarantee access…The current financial system
is not transparent. Bank customers have very little information on the financial health of their bank and
must place their faith in the limited government protection of FDIC [Federal Deposit Insurance
Corporation] insurance on their deposits…Centralization has many layers. Most consumers and
businesses deal with a single, localized bank. The bank controls rates and fees. Switching is possible,
but it can be costly. Further, the US banking system is highly concentrated…Our financial system is
siloed and designed to sustain high switching costs. Moving money from one institution to another
can be unduly lengthy and complicated.6

Still, they cautioned, “Blockchains can remove traditional financial risks, such as counterparty risk, with
their unique properties, but DeFi is built on code. This software foundation gives attackers a larger attack
surface than the threat vectors of traditional financial institutions.”7

DeFi projects was the term used to describe offerings. Common DeFi projects included decentralized
exchanges (DEXs), lending and borrowing, derivatives, payments, insurance, savings, wallets, and stablecoins.
(See Exhibit 1 for total value locked for DeFi from November 2018 to June 2022 for multiple blockchains.)

Stablecoins

Crypto (or digital money) was the lifeblood of DeFi, particularly a type called stablecoins. Cryptos were
bought and sold either on centralized exchanges (CEXs)—such as Binance, Coinbase, Gemini, and Kraken—
or on DEXs—such as Curve, Thorchain, and UniSwap. DEXs were not subject to the same oversight as
traditional exchanges, such as the New York Stock Exchange. CEXs typically required users to place assets in
their custody before trading.8 Bitcoin (BTC), the world’s first crypto and not a stablecoin, was introduced in
2009 and available to buy, sell, and trade on online crypto exchanges in 2010. BTC was created to be a peer-to-
peer cash system. Unlike traditional currency, BTC was not backed by a government or a central bank; while
government backing did not eliminate volatility risk, especially in emerging markets, arguably it provided
investors with some measure of safety compared to BTC, which had no intrinsic value and was backed by
nothing.

6 Campbell R. Harvey, Ashwin Ramachandran, and Joseph Santoro, DeFi and the Future of Finance (Hoboken, NJ: John Wiley & Sons, Inc., 2021).
7 Harvey, Ramachandran, and Santoro, DeFi and the Future of Finance.
8 Benedict George, “Centralized Exchange (CEX) vs. Decentralized Exchange (DEX): What’s the Difference?,” CoinDesk, August 5, 2022,

https://www.coindesk.com/learn/centralized-exchange-cex-vs-decentralized-exchange-dex-whats-the-difference/ (accessed Nov. 1, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.coindesk.com/learn/centralized-exchange-cex-vs-decentralized-exchange-dex-whats-the-difference

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Consequently, the value of cryptos that were not stablecoins had been subject to wild swings rendering
them unreliable means of payment.9 In 2018, the value of a BTC, for example, fell from around $20,000 to
$3,000.10 Volatility led to more innovation with the introduction of the first stablecoins in 2014. Stablecoins
were created to offer the features of cryptos (i.e., instant transfers and low fees) without the volatility. In theory,
this meant investors avoided wild swings in the value of their portfolios. By early 2022, there were roughly 20

stablecoins worldwide, a mere fraction of the more than 10,000 total cryptos in existence.11 (See Exhibit 2 for
the top 12 cryptos by market value in September 2022).

Stablecoins were considered the bedrock of DeFi trading and lending.12 More than 90% of trading volume
in cryptos occurred in stablecoins.13 Stablecoins were widely used to move funds between different cryptos or
into regular cash. Members of the Monetary and Economic Department of the Bank for International
Settlements (BIS) wrote,

Initially, stablecoins evolved in order to address the failure of Bitcoin and other cryptocurrencies to
provide an effective monetary and payment instrument. This reflected the preference of main market
participants to base transactions and payments on sovereign fiat currencies [i.e., government issued
and backed], in particular the US dollar. It also reflected weaknesses in Bitcoin and other
cryptocurrencies inter alia as means of payment, store of value or unit of account. However, as no
digital form of the dollar or other sovereign fiat currencies was available, market participants developed
the stablecoin structure as a means to address this issue, as well as to provide an instrument to support
hedging between crypto-assets and fiat currencies. The need was for a bridge between DLT (digital
ledger technology) and fiat currencies, with stablecoins seeking to fill this need. This was particularly
relevant in the context of high volatility in the price of Bitcoin, making it less useful as a payment
instrument and more of an investment—speculative or otherwise—or hedge.14

Stablecoins were either asset-linked (centralized) or algorithm-based (decentralized). The business models
and revenue streams of stablecoin companies varied depending on whether they were a centralized or
decentralized stablecoin.

Asset-linked

Most stablecoins were asset-linked (centralized), meaning they were backed by a reserve pool of collateral—
a fiat currency (e.g., US dollar), assets (e.g., bonds or commercial paper), or even other cryptos. In this model,
which was the closer of the two to traditional structures in the financial services industry, stablecoins were
collateralized off-chain, meaning the “backing” asset was held on the balance sheet or through third-party firms
(e.g., banks).15 Created in 2014, Tether (USDT), was considered the first and largest stablecoin and was asset-
linked backed by the US dollar, meaning an exchange rate of 1:1.16 In other words, for each USDT issued,
Tether Holdings Limited Inc. (Tether), a blockchain company and issuer of USDT, should have $1 in reserves.
Tether and many other of the biggest cryptos maintained a reserve of cash or cash-equivalent assets whose

9 Eswar Prasad, “Five Myths about Cryptocurrency,” Brookings, May 24, 2021, https://www.brookings.edu/opinions/five-myths-about-
cryptocurrency/ (accessed Oct. 13, 2022).

10 Cale Guthrie Weissman, “What the Hell Happened to Crypto This Year?” Fast Company, December 21, 2018,
https://www.fastcompany.com/90285052/beyond-the-bubble-what-happened-to-bitcoin-in-2018 (accessed Oct. 13, 2022).

11 Khristopher J. Brooks, “What Are Stablecoins, and How Do They Differ from Other Cryptocurrencies?,” CBS News, May 13, 2022,
https://www.cbsnews.com/news/stablecoins-definition-cryptocurrency-cbs-news-explains/ (accessed Oct. 13, 2022).

12 Jack Denton, “How a Digital Token Designed to Be Stable Fueled a Crypto Crash,” Barron’s, May 16, 2022.
13 Denton, “How a Digital Token Designed to Be Stable Fueled a Crypto Crash.”
14 Douglas Arner, Raphael Auer, and Jon Frost, “Stablecoins: Risks, Potential and Regulation,” BIS working paper no. 905, November 2020,

https://www.bis.org/publ/work905 (accessed Sept. 29, 2022).
15 “How Do Stablecoin Issuers Make Money?” PYMNTS, June 5, 2022, https://www.pymnts.com/cryptocurrency/2022/how-do-stablecoin-issuers-

make-money/ (accessed Oct. 2, 2022).
16 Tether issued several other fiat stablecoins (e.g., one pegged to gold).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.pymnts.com/cryptocurrency/2022/how-do-stablecoin-issuers

https://www.bis.org/publ/work905

https://www.cbsnews.com/news/stablecoins-definition-cryptocurrency-cbs-news-explains

https://www.fastcompany.com/90285052/beyond-the-bubble-what-happened-to-bitcoin-in-2018

https://www.brookings.edu/opinions/five-myths-about

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value in theory matched the total value of the stablecoin in circulation. That is, when a buyer paid Tether $1
for a USDT, that money was supposed to be held in Tether’s bank accounts. (Tether revealed in 2019 that it
held billions of its reserve not in cash but in US commercial paper, which were riskier and less liquid than cash,
especially during financial turmoil as was shown during the global financial crisis.)17 Because of its wide use to
transfer digital assets into fiat currency and vice versa and transact between different platforms, USDT was
described as “the reserve currency of the crypto world.”18 It facilitated billions of dollars’ worth of trades every
day. In times of high volatility in cryptos, investors often put their cash into USDT. On May 7, 2022, the market
cap of USDT was $83.2 billion.19

Asset-linked stablecoin companies made money through short-term lending and investing. Companies used
their reserve assets and lent them out to others earning interest, counting on the unlikelihood that a large
number of stablecoin holders would redeem their collateral at once.20 Tether, for example, loaned $1 billion to
Celsius in October 2021, at an annual interest rate of 5% to 6%.21 Asset-linked stablecoin companies also
generated revenue by charging issuance and redemption fees, although fees were relatively small (Tether
charged a 0.1% redemption fee and had a minimum withdrawal fee of $1,000 to discourage low-volume
redemptions.)22

Algorithm-based

Algorithm-based (decentralized) stablecoins used algorithms to increase or decrease the stablecoin supply
in reaction to demand.23 “The decentralized model uses smart contracts, the cryptos themselves or algorithms
to keep that ‘peg’ in place, where a 1:1 relationship relies not on the traditional custodians, but on constant
rebalancing of supply and demand.”24 TerraUSD (UST) was a leading algorithmic stablecoin (with nearly a
$19 billion market cap at its peak on May 5, 2022) on the Terra blockchain.25 In theory, its peg was maintained
by an automated arbitrage mechanism linked to a sister token, LUNA, a free-floating Terra coin. A UST could
be exchanged for $1 worth of LUNA by burning the stablecoin and minting LUNA.26 Whenever either of them
was exchanged, they were taken out of the circulation by the smart contracts programmed to maintain the
system.27

It was “a complex mechanism involving swapping UST coins with LUNA, a free-floating crypto control
supply.” (See Exhibit 3.) UST and LUNA were both on the Terra blockchain. “To entice traders to burn
LUNA to create [UST], creators offered an insane 19.5% yield on staking—which is essentially crypto
terminology for earning 19.5% interest on a loan—through what they called the Anchor Protocol,” wrote an
observer.28 Terraform Labs had created DeFi project Anchor, a savings platform, in 2020. DeFi projects were
software protocols running on top of a blockchain network. Investors remained in full control of their cryptos,
but they did devolve or cede all their power of executing transactions to smart contracts.

17 Gillian Tett, “Stablecoin Investors May Be Due a Wake-Up Call,” Financial Times, October 14, 2021.
18 Tett, “Stablecoin Investors May Be Due a Wake-Up Call.”
19 “Tether,” Coin Market Cap, 2022, https://coinmarketcap.com/currencies/tether/ (accessed Oct. 22, 2022).
20 Sungyu Kwon, “How Do Stablecoins Make Money?,” Benzinga, June 2, 2022, https://www.benzinga.com/money/how-do-stablecoins-make-

money (accessed Sept. 30, 2022).
21 https://www.benzinga.com/money/how-do-stablecoins-make-money.
22 https://www.benzinga.com/money/how-do-stablecoins-make-money.
23 https://www.bis.org/publ/work905 .
24 https://www.pymnts.com/cryptocurrency/2022/how-do-stablecoin-issuers-make-money/.
25 Created by South Korea’s Terra Labs, which was founded in 2018.
26 https://www.pymnts.com/cryptocurrency/2022/how-do-stablecoin-issuers-make-money/.
27 Muyao Shen, “How $60 Billion in Terra Coins Went up in Algorithmic Smoke,” Bloomberg, May 21, 2022,

https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer/ (accessed Oct. 14, 2022).
28 Daniel Van Boom, “Luna Crypto Crash: How UST Broke and What’s Next for Terra,” CNET, May 25, 2022, https://www.cnet.com/personal-

finance/crypto/luna-crypto-crash-how-ust-broke-and-whats-next-for-terra/ (accessed Oct. 1, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.cnet.com/personal

https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer

How Do Stablecoin Issuers Make Money?

https://www.bis.org/publ/work905

https://www.benzinga.com/money/how-do-stablecoins-make-money

https://www.benzinga.com/money/how-do-stablecoins-make

https://coinmarketcap.com/currencies/tether

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Risk to the financial system

Regulators in the United States and abroad had grown increasingly concerned that stablecoins could pose
a systemic risk to financial systems. US Treasury Secretary Janet Yellen said as much. “They present the same
kind of risks that we have known for centuries in connection with bank runs,” Yellen told congressional leaders,
urging Congress to approve federal regulation of stablecoins by the end of 2022.29 European Central Bank
executive board member Fabio Panetta echoed Yellen’s concerns. The European Union was planning new rules
known as the Markets in Crypto-Assets Regulation (MiCA) to regulate stablecoins.30 The chair of the Financial
Times US editorial board wrote,

Should the mainstream financial world care? Some seasoned performers might argue not. After all,
stablecoins currently act somewhat like the poker chips of a cyber casino. While the tokens are used to
make trades within the confines of crypto-land, they can only be used there. As a result it should not
matter if they turn out, say, to be part of a pyramid scheme, as long as that casino is self contained—
or so the optimistic argument goes. Yet that idea seems more and more naive. For one thing,
mainstream investors and institutions are increasingly being pulled into the crypto world, for
investment purposes, if nothing else. For another, the market now has tentacles into other parts of
finance, as Tether’s holdings of US commercial paper shows. This might create contagion risk, as Fitch
ratings noted…particularly if these products are combined with the type of leverage that might spark
margin calls in a crunch (which they increasingly are).31

Lending Platforms

Unlike traditional banks, crypto lending companies were not overseen by financial regulators. For example,
rules on capital requirements or transparency of reserves were nonexistent, meaning depositors faced risks of
losing their funds in addition to risks associated with volatility in crypto markets that affected the value of
cryptos they had loaned out. Crypto lending platforms were either decentralized (DeFi) or centralized (CeFi).

Decentralized

DeFi lending platforms matched savers and borrowers, peer-to-peer, entirely on an algorithm and used
smart contracts to execute the transaction. Anyone who had access to the platform could provide cryptos to
lend out or borrow without either party required to identify themselves. Depositors made money by lending
their cryptos, typically receiving between a 5% and 10% interest rate, to investors or crypto companies for
speculation, hedging, or as working capital. “DeFi lending platforms allowed [borrowers] to deposit collateral
in the form of crypto assets and receive assets, typically dollar-denominated stablecoins, in return…Borrowers
often take out DeFi loans to retain exposure to price movements in the collateral they post, while using the
loan to purchase other assets or to finance consumption (similar to taking out a margin loan against a stock
portfolio).”32 In addition, “Rates on DeFi platforms typically exceed those offered by banks on retail deposits
because the lender was taking more risk, and the borrower expected to make higher rates of return on
speculative crypto asset investments.”33 Normally, borrowers had to secure loans with collateral in cryptos and
were limited to borrowing an amount typically less than the full value of the collateral. 34 Despite this

29 Ryan Browne, “Regulators Are Getting Nervous about Stablecoins after Terra’s Stunning Collapse,” CNBC, May 13, 2022,
https://www.cnbc.com/2022/05/13/regulators-anxious-about-stablecoins-like-tether-after-ust-collapse.html (accessed Oct. 2, 2022).

30 Ryan Browne, “Investors Withdraw over $7 Billion from Tether, Raising Fresh Fears about Stablecoin’s Backing,” CNBC, May 17, 2022,
https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html (accessed Oct. 1, 2022).

31 Tett, “Stablecoin Investors May Be Due a Wake-Up Call.”
32 Carapella et al., “Decentralized Finance (DeFi): Transformative Potential & Associated Risks.”
33 Carapella et al., “Decentralized Finance (DeFi): Transformative Potential & Associated Risks.”
34 Carapella et al., “Decentralized Finance (DeFi): Transformative Potential & Associated Risks.”

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html

https://www.cnbc.com/2022/05/13/regulators-anxious-about-stablecoins-like-tether-after-ust-collapse.html

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overcollateralization, lending platforms faced exposures to fluctuations in the price of the underlying collateral
asset.35 In a bulletin released in June 2022, the BIS wrote,

On one side are individual depositors (also known as lenders), who deposit (or “stake”) their crypto
assets into so-called liquidity pools, earning a deposit rate. On the other side are the borrowers, who
receive crypto assets and pay a borrowing rate. The two rates vary by crypto asset and are determined
by the demand for loans and the size of the liquidity pool, which represents the supply of funds. For
their services, platforms usually charge fees paid by the borrower. As the process is automated, loan
disbursement is nearly instantaneous and associated costs are modest.36

Leading DeFi lending platforms included Aave, MakerDAO (which allowed investors to borrow DAI,
MakerDAO’s decentralized stablecoin pegged to the US dollar), and Compound. All three launched in 2017.

Centralized

With CeFi lending platforms, an entity (either a standalone company or a crypto exchange with a lending
platform) oversaw and facilitated the lending and borrowing process. Therefore, depositors and borrowers—
both needed to register with the platform—making them the customers, much like with traditional banks. CeFi
lending platforms did not use blockchains or smart contracts and did not connect parties peer-to-peer, but
rather pooled crypto deposits and then loaned them out to borrowers.

Banks Are Not Your Friends

In 2017, CEO Alex Mashinsky and Daniel Leon founded Celsius, a lending platform for cryptos including
stablecoins, with the idea to disintermediate the financial system. “We live in a peer-to-peer society where we
no longer need the support of global financial institutions to conduct our everyday lives,” said Mashinsky, who
on occasion would wear a black T-shirt imprinted with “Banks are not your friends.” in white letters.37 Celsius
was not a decentralized lending platform agnostic to its participants. “Celsius is not a neutral platform,”
Mashinsky explained. “Our job every day is to represent the depositor…and extract as much as possible out of
the borrower…institutions and hedge funds…We take money from these institutions; they pay us interest and
we distribute it pro rata to the depositors.”38 According to Mashinsky, Celsius straddled both DeFi and CeFi.
The company used smart contracts and open ledgers but also aggregated the custodial wallets that allowed
borrowing and earning yield for its depositors.39 “Pure DeFi is not necessarily a good thing,” he said. “Because
if you are pure DeFi, most people on the planet…cannot participate in DeFi. It is too hard for them. It is too
difficult for them to understand the technology…how smart contracts behave…you are seeing this migration
towards the middle.”40

Accessible to anyone with a smartphone, Celsius was a blockchain-integrated fintech platform that offered
lending, yield creation, and payments solutions. Depositors (largely retail investors) could stake their cryptos
on the platform, which accepted more than 35 cryptos, including BTC and Ether (ETH), and stablecoins like
USDT.41

35 Carapella et al., “Decentralized Finance (DeFi): Transformative Potential & Associated Risks.”
36 Sirio Aramonte et al., “DeFi Lending: Intermediation without Information?” BIS Bulletin no. 57, June 14, 2022,

https://www.bis.org/publ/bisbull57 (accessed Oct. 14, 2022).
37 “Celsius Network Launches Crypto-Backed Lending Platform,” CISION PR Newswire, March 16, 2018.
38“BlockDown 2.0 – DeFi vs CeFi – Alex Mashinsky X Rune Christensen,” YouTube video, 7:55, posted by “BlockDown TV,” June 26, 2020,

https://www.youtube.com/watch?v=K7H6evLGYXQ (accessed Oct. 13, 2022).
39 Alex Mashinsky, “The Best of Both Worlds: How Celsius Straddles Both CeFi and DeFi,” Medium, January 26, 2021,

https://mashinsky.medium.com/the-best-of-both-worlds-how-celsius-straddles-both-cefi-and-defi-d15325c61814 (accessed Oct. 13, 2022).
40 https://www.youtube.com/watch?v=K7H6evLGYXQ.
41 The currency of the Ethereum blockchain.

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This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://mashinsky.medium.com/the-best-of-both-worlds-how-celsius-straddles-both-cefi-and-defi-d15325c61814

https://www.bis.org/publ/bisbull57

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There was no minimum amount of cryptos to stake to participate and no lockup period or penalty for
withdrawing cryptos. Besides earning interest on their staked cryptos, depositors could also borrow US dollars
using their staked cryptos as collateral. This allowed them to keep their cryptos while accessing fiat liquidity.
These loans were overcollateralized, meaning their dollar amount was at most 50% of the collateral value.42

“The remaining untapped collateral acts as a buffer against crypto price fluctuations,” wrote Mashinsky.43

Because loans were collateralized, they were executed in minutes.

Depositors received weekly interest payments at generous annual rates, dependent on the crypto
deposited.44 Rates changed weekly based on market conditions (e.g., borrowing demand for a specific crypto).
BTC deposits earned around 3% to 8%, ETH 4% to 7%, and USDT 9% to 11%, while the top rate of 18%
went to deposits of Synthetix Network (SNX), a protocol that enabled the issuance of synthetic assets on the
Ethereum blockchain.45 Moreover, depositors received the highest range of the aforementioned rates if they
accepted yields in Celsius’s own token called CEL. The CEL’s initial coin offering (ICO) in 2018 raised $50
million, with CEL valued at $0.30 per token.46 “Initially, only 50% of the tokens were issued, with 25% going
to the founding team and the remaining locked in a smart contract,” wrote Mashinsky.47 By receiving interest
for the cryptos they lent, depositors could earn up to 30% if they took their interest in CEL. Meanwhile, by
paying interest in CELs, borrowers could receive discounts up to 30% on their interest payments.48 The benefits
to the lender or the borrower depended on the amount of CELs they held on the platform (see Table 1).

Table 1. Celsius rewards.

Reward Status CEL Ratio CEL Balance Bonus Rewards Loan Interest Discount

Bronze 5%–10% or 1 10% 5%

Silver 10%–15% or 1,000 15% 10%

Gold 15%–25% or 10,000 20% 15%

Platinum 25%–100% or 25,000 30% 25%

Source: Celsius, 2022, https://celsius.network/cel-token-explained (accessed Nov. 1, 2022).

Celsius was the biggest holder of CEL and included those holdings as an asset on its balance sheet. It was
also a major buyer of the token, purchasing the CEL interest it owed to customers on the open market each
week.49 Celsius did not consider CELs to be a security under applicable laws but wrote, “due to regulatory
uncertainty, we are taking precautionary action and treating CEL tokens as though they might be viewed as a
security by U.S. financial authorities in the future.”50

While depositors earned substantially more than what they would earn if they had deposited the cash
equivalent of their cryptos in a bank, they did run the risk that the value of the crypto could drop, as they were

42 Alex Mashinsky, “What Is the Celsius Network?,” Gemini, January 14, 2022, https://www.gemini.com/cryptopedia/celsius-network-token-cel
(accessed Oct. 14, 2022).

43 https://www.gemini.com/cryptopedia/celsius-network-token-cel.
44 Zeke Faux and Joe Light, “Celsius’s 18% Yields on Crypto Are Tempting—and Drawing Scrutiny,” Bloomberg, January 27, 2022,

https://www.bloomberg.com/news/articles/2022-01-27/celsius-s-18-yields-on-crypto-are-tempting-and-drawing-scrutiny (accessed Sept. 29, 2022).
45 https://www.bloomberg.com/news/articles/2022-01-27/celsius-s-18-yields-on-crypto-are-tempting-and-drawing-scrutiny.
46 Ivanontech, “What Is Celsius Network and CEL Token?,” Academy, January 28, 2021, https://academy.moralis.io/blog/what-is-celsius-network-

and-the-cel-token (accessed Nov. 1, 2022).
47 https://www.gemini.com/cryptopedia/celsius-network-token-cel.
48 https://www.gemini.com/cryptopedia/celsius-network-token-cel.
49 Kadhim Shubber and Joshua Oliver, “Inside Celsius: How One of Crypto’s Biggest Lenders Ground to a Halt,” Financial Times, July 13 2022,

https://www.ft.com/content/4fa06516-119b-4722-946b-944e38b02f45 (accessed Oct. 13, 2022).
50 “Accredited Investor FAQs,” Celsius Network website, June 2022, https://support.celsius.network/hc/en-us/articles/4406861138961-

Accredited-Investor-FAQ#:~:text=Celsius%20does%20not%20consider%20CEL,financial%20authorities%20in%20the%20future (accessed Nov. 1,
2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://support.celsius.network/hc/en-us/articles/4406861138961

https://www.ft.com/content/4fa06516-119b-4722-946b-944e38b02f45

https://www.gemini.com/cryptopedia/celsius-network-token-cel

https://academy.moralis.io/blog/what-is-celsius-network

https://www.bloomberg.com/news/articles/2022-01-27/celsius-s-18-yields-on-crypto-are-tempting-and-drawing-scrutiny

https://www.gemini.com/cryptopedia/celsius-network-token-cel

https://celsius.network/cel-token-explained

Page 8 UV8663

not covered by federal deposit insurance. The company claimed it could pay such high rates to depositors
because “it invests the deposits and earns even bigger returns, in part by lending cryptocurrency to traders, who
are willing to pay high rates to use it for bets.”51 Indeed, Celsius pooled all the crypto deposits and lent them
to institutional investors with interest. “There’s a lot of confusion about where yield comes from,” Mashinsky
said. “Celsius generates a certain amount of profit by lending assets, similar to what banks do. We lend them
out on a short-term basis. These are not loans. We lend financial assets to players that can transact and generate
income for themselves through arbitrage, market making or shorting certain stocks or digital assets.”52 He
claimed Celsius returned 80% of its earnings to depositors in the form of rewards and attractive interest rates.
“But how does Celsius afford to do this?” Mashinsky added. “The key lies in the over-collateralization of crypto
loans and rehypothecation, a process by which crypto funds held as collateral on the Celsius Network are lent
to another party—in this case, large investors looking for reliable inroads into cryptocurrency.”53

In December 2021, Celsius raised $600 million in equity fundraising led by two investors—Canada’s
second-largest pension fund Caisse de dépôt et placement du Québec and US investment group WestCap. At
the time. Celsius was valued at $3 billion.54

Investing in DeFi projects

While Celsius made money by the spread between the interest rates borrowers paid and the interest rates
the company paid to its depositors, it also began lending to medium-to-high risk DeFi projects using pooled
deposits to generate high yields. “The shift to higher-risk strategies was likely thanks to increased deposits in
response to its high yield offerings, combined with declines in institutional interest as the crypto market started
to cool in late-2021,” posited one crypto columnist.

For example, Celsius invested in Anchor, which was a “sort of crypto bank” established by Terraform
Labs, the issuer of UST. Anchor, a blockchain-based protocol, offered returns of nearly 20% on deposits and
invested mostly in UST. In the June 2020 Anchor whitepaper, the authors wrote,

Anchor is a savings protocol that accepts Terra deposits, allows instant withdrawals and pays
depositors a low-volatility interest rate. To generate yield, Anchor lends out deposits to borrowers who
put down liquid-staked PoS [proof of stake] assets from major blockchains as collateral (bAssets).
Anchor stabilizes the deposit interest rate by passing on a variable fraction of the bAsset yield to the
depositor. It guarantees the principal of depositors by liquidating borrowers’ collateral via liquidation
contracts and third-party arbitrageurs.56

Lending to DeFi had a different risk profile than lending to institutional borrowers. “On the one hand,
there is smart contract risk, there is protocol risk,” said the head of research at a crypto investment bank. “Also,
lending in DeFi exposes you significantly to volatile market moves…[The risk] isn’t the same as relying on

51 https://www.bloomberg.com/news/articles/2022-01-27/celsius-s-18-yields-on-crypto-are-tempting-and-drawing-scrutiny.
52 Oliver Knight, “How Crypto Lender Celsius Overheated,” CoinDesk, June 16, 2022, https://www.coindesk.com/business/2022/06/16/how-

crypto-lender-celsius-overheated/ (accessed Feb. 13, 2023).
53 https://www.gemini.com/cryptopedia/celsius-network-token-cel.
54 Kadhim Shubber, “Alex Mashinsky Took Control of Celsius Trading Strategy Months before Bankruptcy,” Financial Times, August 16, 2022.

David Morris, “Satoshi Wept: How Crypto Replayed the 2008 Financial Crisis,” CoinDesk, July 12, 2022,
https://www.google.com/search?q=David+Morris%2C+%E2%80%9CSatoshi+Wept%3A+How+Crypto+Replayed+the+2008+Financial+Crisis%
2C%E2%80%9D+CoinDesk%2C+July+12%2C+2022.&rlz=1C1GCEB_enUS868US874&oq=David+Morris%2C+%E2%80%9CSatoshi+Wept%3
A+How+Crypto+Replayed+the+2008+Financial+Crisis%2C%E2%80%9D+CoinDesk%2C+July+12%2C+2022.&aqs=chrome..69i57.3899j0j15&s
ourceid=chrome&ie=UTF-8 (accessed Feb. 13, 2023).

56 Nicholas Platis, Eui Joon Lee, and Marco Di Maggio, “Anchor: Gold Standard for Passive Income on the Blockchain,” Anchor, June 2020,
https://www.anchorprotocol.com/docs/anchor-v1.1 (accessed Oct. 23, 2020).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.anchorprotocol.com/docs/anchor-v1.1

https://www.google.com/search?q=David+Morris%2C+%E2%80%9CSatoshi+Wept%3A+How+Crypto+Replayed+the+2008+Financial+Crisis

https://www.gemini.com/cryptopedia/celsius-network-token-cel

https://www.coindesk.com/business/2022/06/16/how

https://www.bloomberg.com/news/articles/2022-01-27/celsius-s-18-yields-on-crypto-are-tempting-and-drawing-scrutiny

Page 9 UV8663

crypto market prices to sustain or grow…putting customer assets in DeFi markets is significantly riskier than
lending on a secured basis to institutional counterparties.”57

Crypto Winter 2022

Just as the weather in spring 2022 was warming, DeFi was heading into what many later called a “crypto
winter.” In November 2021, the worldwide market cap of cryptos [number of cryptos times their price] had
peaked at $3 trillion.58 Over the next two months, a substantial investor sell-off skinned more than $1 trillion
of value. Reasons for the selloff were myriad and included rising interest rates, inflation, and the possibility of
increased regulation. By the end of March, cryptos had rebounded to a market cap of around $2.2 trillion, only
to fall below $2 trillion in April.59 But the worst was yet to come (see Table 2).

Table 2. Worldwide crypto market capitalization, July 2010 to September 2020.

500

1,000

1,500

2,000

2,500

3,000

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Source: Adapted from https://www.statista.com/statistics/730876/cryptocurrency-maket-value/.

Over the course of three days (May 7–10), the situation deteriorated as investors fled from Anchor, thus
destabilizing UST. One analysis of on-chain transactions found that 20 addresses made a total of 5,051
transactions withdrawing $2 billion UST from Anchor.60 Among those addresses was one belonging to Celsius.
(One other on-chain analysis found that Celsius had invested more than $500 million in Anchor over the prior
five months.)61 On May 9, UST broke its dollar peg (see Table 3).

57 https://www.coindesk.com/business/2022/06/16/how-crypto-lender-celsius-overheated/.
58 “Overall Cryptocurrency Market Capitalization per Week from July 2010 to September 2022,” Statista, September 29, 2022,

https://www.statista.com/statistics/730876/cryptocurrency-maket-value/ (accessed Oct. 20, 2022).
59 https://www.statista.com/statistics/730876/cryptocurrency-maket-value/.
60 Aurelie Barthere et al., “On-Chain Forensics: Demystifying TerraUSD De-peg,” Nansen, May 27, 2022, https://www.nansen.ai/research/on-chain-

forensics-demystifying-terrausd-de-peg (accessed Oct. 20, 2022).
61 Ryan Weeks, “Celsius Pulled Half a Billion Dollars out of Anchor Protocol Amid Terra Chaos,” Block, May 13, 2022,

https://www.theblock.co/post/146752/celsius-pulled-half-a-billion-dollars-out-of-anchor-protocol-amid-terra-chaos (accessed Oct. 22, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.theblock.co/post/146752/celsius-pulled-half-a-billion-dollars-out-of-anchor-protocol-amid-terra-chaos

https://www.nansen.ai/research/on-chain

https://www.statista.com/statistics/730876/cryptocurrency-maket-value

https://www.coindesk.com/business/2022/06/16/how-crypto-lender-celsius-overheated

https://www.statista.com/statistics/730876/cryptocurrency-maket-value

Page 10 UV8663

Table 3. TerraUSD (UST) price, May 1, 2022, to May 15, 2022.

Date Open High Low Close Volume (millions)

5/1/2022 $1.000 $1.003 $0.998 $1.002 566.6

5/2/2022 $1.002 $1.003 $0.998 $1.001 574.2

5/3/2022 $0.999 $1.002 $0.998 $1.000 453.0

5/4/2022 $1.000 $1.002 $0.997 $0.999 612.3

5/5/2022 $1.001 $1.003 $0.998 $1.000 733.9

5/6/2022 $1.000 $1.003 $0.998 $1.000 649.6

5/7/2022 $1.000 $1.002 $0.993 $0.997 1,335.2

5/8/2022 $0.997 $1.000 $0.991 $0.996 2,025.9

5/9/2022 $0.995 $0.999 $0.793 $0.793 2,810.0

5/10/2022 $0.806 $0.949 $0.684 $0.800 4,906.0

5/11/2022 $0.799 $0.847 $0.300 $0.801 7,679.8

5/12/22 $0.801 $0.829 $0.363 $0.409 9,392.2

5/13/22 $0.406 $0.407 $0.133 $0.154 1,285.9

5/14/22 $0.162 $0.255 $0.148 $0.196 376.5

5/15/22 $0.196 $0.261 $0.170 $0.177 335.2

Source: Compiled from “TerraClassicUSD (UST-USD),” Yahoo! Finance, October 10, 2022, https://finance.yahoo.com/quote/UST
USD/history/ (accessed Oct. 22, 2022).

Those withdrawals begat more withdrawals as investors took out around $5 billion over several days, more
than one-third of Anchor’s total deposits, which were largely in UST.62 Most observers ascribed the withdrawals
to investor jitters, while some floated that it was a premeditated attack by BlackRock and Citadel Securities to
take down UST.63 With the promise of double-digit yields, investors had flocked to Anchor catapulting the
circulating supply of UST from $2 billion to a high of $18.5 billion in a year, as investors needed UST to
deposit.64 Critics had warned that Anchor’s high yield was unstainable “because interest revenue from borrows
did not cover yield payouts and required an outside source to replenish the reserves.”65 One month after the
UST broke its peg, the worldwide market cap of cryptos had lost around another $1 trillion dollars in value.66

“The huge sell-offs brought down the price of UST to $0.91, from $1,” wrote an observer. “As a result,
traders started to change 90 cents worth of UST for $1 of Luna. Once a large amount of UST had been
offloaded, the stablecoin started to depeg. In a panic, more people sold off UST, which led to the minting of
more Luna and an increase in the circulating supply of Luna.”67

62 Krisztian Sandor, “Investors Flee Terra’s Anchor as UST Stablecoin Repeatedly Loses $1 Peg,” CoinDesk, May 9, 2022,
https://www.coindesk.com/markets/2022/05/09/investors-flee-terras-anchor-as-ust-stablecoin-repeatedly-loses-1-peg/ (accessed Oct. 1, 2022).

63 Jon Sarlin, “Stablecoins Were Supposed to Be ‘Stable.’ Then the Crash Came,” CNN Business, May 17, 2022,
https://www.cnn.com/2022/05/17/investing/luna-terra-losses-crypto-traders (Nov. 1, 2022).

64 https://www.coindesk.com/markets/2022/05/09/investors-flee-terras-anchor-as-ust-stablecoin-repeatedly-loses-1-peg/.
65 https://www.coindesk.com/markets/2022/05/09/investors-flee-terras-anchor-as-ust-stablecoin-repeatedly-loses-1-peg/.
66 https://www.statista.com/statistics/730876/cryptocurrency-maket-value/.
67 ‘What Really Happened to LUNA Crypto?,” Forbes, September 20, 2022, https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-

to-luna-crypto/?sh=6bc8a41f4ff1 (accessed Oct. 20, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.forbes.com/sites/qai/2022/09/20/what-really-happened

https://www.statista.com/statistics/730876/cryptocurrency-maket-value

https://www.coindesk.com/markets/2022/05/09/investors-flee-terras-anchor-as-ust-stablecoin-repeatedly-loses-1-peg

https://www.cnn.com/2022/05/17/investing/luna-terra-losses-crypto-traders

https://www.coindesk.com/markets/2022/05/09/investors-flee-terras-anchor-as-ust-stablecoin-repeatedly-loses-1-peg

https://finance.yahoo.com/quote/UST

Page 11 UV8663

In theory, when the market value of one UST was less than its $1 peg, investors were incentivized to trade
one UST for $1 worth of LUNA (which could be more than or less than one LUNA depending on its market
price at the time), taking the profit. This removed one UST from circulation, driving the value of the UST back
up.68 When UST lost its peg, however, “arbitrageurs pounced, driving the price of LUNA into the floor,”
according to one observer.69 “The system works only if traders actually want Luna. Investors did not want Luna
when UST lost its peg this week,” said another. “They sold Luna in a panic.”70 Three days later, on May 12, the
price of LUNA had fallen from $80 to a few cents. The collapse of Luna and UST cost investors $60 billion.71

“The UST-Luna exchange mechanism meant that the massive UST withdrawals led to a vast expansion in the
supply of Luna, driving down its value even further.”72 (See Exhibit 4.)

Meanwhile, USDT fell briefly below its $1 peg (to as low as $0.95) amid panic over the UST collapse and
questions over the existence and quality of the assets backing it one-to-one with the US dollar.73 By May 17,
the circulating supply of USDT dropped from about $83 billion to less than $76 billion as investors withdrew
more than $7 billion after UST briefly dropped from its $1 peg.74 (See Exhibit 5 for USDT price versus BTC.)

Crypto’s “Lehman Brothers” Moment

On June 17, 2022, Celsius froze its clients’ accounts. The company posted a memo to its clients, stating,

Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals,
Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position
to honor, over time, its withdrawal obligations…We are taking this necessary action for the benefit of
our entire community in order to stabilize liquidity and operations while we take steps to preserve and
protect assets.75

Celsius’s predicament echoed the troubles that took down Lehman Brothers in 2008 when the US housing
bubble burst. The investment bank had been heavily invested in mortgage-backed securities (MBSs), which
held subprime loans. As those loans began to default, the value of Lehman Brothers’ holdings in MBSs
plummeted, forcing the firm to file bankruptcy and close its door permanently.

Celsius’s troubles predated the crypto collapse. In December 2021, it had lost $54 million of BTC, which
the company had invested in BadgerDao, a DeFi platform, because of hackers.76 The company had also
invested at least $450 million of customers’ ETH in Lido Finance, a DeFi platform that offered investors an
opportunity to make money from a new version of ETH under development, known as “staked Ether”
(stETH).77 One stETH was supposed to be redeemable for one ETH. But stETH’s price dropped compared

68 https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer/.
69 https://www.pymnts.com/cryptocurrency/2022/how-do-stablecoin-issuers-make-money/.
70 Peter Weber, “The Stablecoin Cryptocurrency Crash, Explained,” Week, June 17, 2022, https://theweek.com/briefing/1014448/the-stablecoin-

cryptocurrency-crash-explained (accessed Feb. 13, 2023).
71 Wayne Duggan and Farren Powell, “What Is Celsius? Why Is It Crashing the Crypto Market?,” Forbes, July 18, 2022,

https://www.forbes.com/advisor/investing/cryptocurrency/what-is-celsius/ (accessed Oct. 2, 2022).
72 https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer/.
73 In 2021, New York’s attorney general fined Tether $18.5 million, claiming it had lied about its reserves and calling it “a stablecoin without stability.”

David Yaffe-Bellany, “The Coin that Could Wreck Crypto,” New York Times, June 17, 2022, https://www.nytimes.com/2022/06/17/technology/tether-
stablecoin-cryptocurrency.html#:~:text=In%202021%2C%20New%20York’s%20attorney,as%20a%20loosely%20regulated%20bank (accessed Dec.
18, 2022).

74 https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html.
75 “A Memo to the Celsius Community,” Celsius, June 12, 2022, https://celsiusnetwork.medium.com/a-memo-to-the-celsius-community-

59532a06ecc6 (accessed Oct. 2, 2022).
76 Hannah Lang et al., “How Crypto Lender Celsius Stumbled on Risky Bank-Like Investments,” REUTERS, June 15, 2022,

https://www.reuters.com/business/finance/how-crypto-lender-celsius-stumbled-risky-bank-like-investments-2022-06-15/ (accessed Sept. 29, 2022).
77 “Lido’s $stETH in a Rough Patch Starts to De-peg,” CoinCodeCap, June 11, 2022, https://coincodecap.com/lidos-steth-in-a-rough-patch-starts-

to-de-peg (accessed Nov. 7, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://coincodecap.com/lidos-steth-in-a-rough-patch-starts

https://www.reuters.com/business/finance/how-crypto-lender-celsius-stumbled-risky-bank-like-investments-2022-06-15

https://celsiusnetwork.medium.com/a-memo-to-the-celsius-community

https://www.cnbc.com/2022/05/17/tether-usdt-redemptions-fuel-fears-about-stablecoins-backing.html

https://www.nytimes.com/2022/06/17/technology/tether

https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer

https://www.forbes.com/advisor/investing/cryptocurrency/what-is-celsius

https://theweek.com/briefing/1014448/the-stablecoin

How Do Stablecoin Issuers Make Money?

https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer

Page 12 UV8663

to ETH; the crypto market fall prompted holders to dump their stETH. According to a former Celsius
executive, the company’s biggest failure was in its risk management practices when it came to investing in DeFi
projects.78 Outside of the company’s lending to DeFi projects, Mashinsky also became directly involved with
Celsius’s trading activities over fears of a crypto downturn. (Celsius’ trading desk largely operated manually on
the exchanges it used.)79 For example, Mashinsky ordered the sale of millions of BTC expecting to buy it back
at a lower price; however, the price did not fall, thus losing the company money.80 Meanwhile, the price of the
CEL dropped more than 50% on the news of the withdrawal freeze. (See Exhibit 6.)

Ankram Intelligence, a crypto intelligence firm, analyzed Celsius’s situation and concluded, “Celsius was
one of the biggest players in DeFi, accounting for a huge portion of the funds deployed to the three largest
[lending] DeFi protocols, Compound, Aave, and Maker.”81 Ankram analysts wrote,

Celsius appears to have managed a notable portion of its assets more like a hedge fund than a bank,
investing deposits aggressively in the crypto markets rather than lending them out in a low-risk manner
to sophisticated institutions. Because Celsius is a centralized company, much of its balance sheet exists
off-chain, leaving only Celsius with the complete picture. Yet a careful analysis of the on-chain data
still provides valuable insight into Celsius’ operations…[It] had billions of dollars in leveraged positions
on decentralized finance (DeFi) protocols that were threatened with liquidation in the June crypto
market crash…to avoid liquidation, it appears Celsius was forced to deploy $750 million of liquid assets
that could no longer be used to meet withdrawal obligations. Celsius’ decision to take these leveraged
positions may have played a critical role in [its] decision to pause user withdrawals, swaps and
transfers.82

In bankruptcy court filings in July 2022, Celsius said it had more than 100,000 creditors, some
23,000 outstanding loans to retail borrowers worth $411 million, which were backed by crypto collateral worth
$766 million.83 Celsius listed its largest 50 creditors, without mention of the order in which they would be
repaid.84 Many of its 1.7 million clients were individual investors.85 (See Exhibit 7 for Celsius assets and
liabilities.) One industry executive called Celsius the Lehman Brothers of 2022, writing,

The collapse [for both] came because of a desire to keep up with the competition and get more and
more clients, which pushed risk management beyond the reasonable limits of the sector…one of the
amazing things is that because everything is done on a blockchain infrastructure, there is a high level
of transparency—and this is in contrast to Lehman Brothers, where everything suddenly exploded out
of nowhere. Companies that monitor and analyze what is done on the blockchain saw that Celsius has
a locked position in smart contracts, and started saying that this position is stuck because there is no
liquidity there. Then the rumor started running on Twitter that they haven’t been liquid for six months,
and that if you try to withdraw you will not receive the coins. This is also one of the biggest mistakes

78 Kate Rooney et al., “Former Employees Say Issues Plagued the Crypto Company Celsius Years ahead of Bankruptcy,” CNBC, July 19, 2022,
https://www.cnbc.com/2022/07/19/former-employees-say-issues-plagued-crypto-company-celsius-years-before-bankruptcy.html (Oct 1. 2022).

79 Kadhim Shubber and Joshua Oliver, “Inside Celsius: One of Crypto’s Biggest Lenders Having a ‘Lehman Brothers Moment,’” Financial Times, July
13, 2022.

80 Shubber, “Alex Mashinsky Took Control of Celsius Trading Strategy Months before Bankruptcy.”
81 “Report on the Celsius Network,” Arkham Intelligence, July 7, 2022, https://www.arkhamintelligence.com/reports/celsius-report (accessed Oct.

14, 2022).
82 “https://www.arkhamintelligence.com/reports/celsius-report.
83 “Analysis: Clients of Crypto Lender Celsius Face Long Wait over Fate of Their Funds,” Reuters, July 18, 2022,

https://www.reuters.com/technology/clients-crypto-lender-celsius-face-long-wait-over-fate-their-funds-2022-07-
15/#:~:text=WASHINGTON%2FLONDON%2C%20July%2015%20(,in%20crypto%20markets%20this%20year (accessed Feb. 13, 2023).

84 https://www.reuters.com/technology/clients-crypto-lender-celsius-face-long-wait-over-fate-their-funds-2022-07-
15/#:~:text=WASHINGTON%2FLONDON%2C%20July%2015%20(,in%20crypto%20markets%20this%20year.

85 https://www.reuters.com/technology/clients-crypto-lender-celsius-face-long-wait-over-fate-their-funds-2022-07-
15/#:~:text=WASHINGTON%2FLONDON%2C%20July%2015%20(,in%20crypto%20markets%20this%20year.

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.reuters.com/technology/clients-crypto-lender-celsius-face-long-wait-over-fate-their-funds-2022-07

https://www.arkhamintelligence.com/reports/celsius-report

https://www.cnbc.com/2022/07/19/former-employees-say-issues-plagued-crypto-company-celsius-years-before-bankruptcy.html

Page 13 UV8663

of the Celsius people: they entered positions too openly, and everyone could see their trade. If no one
knew, the withdrawal panic would not have occurred. At Lehman Brothers, only the elite knew.86

On September 27, 2022, Mashinsky resigned. It was then reported that FTX, a crypto exchange, led by
crypto billionaire Sam Bankman-Fried, was reconsidering bidding on Celsius’s assets. FTX had bid and won
the rights to acquire Voyager Digital, another recently bankrupt crypto lender. In July, FTX provided a
$250 million line of credit to troubled lender BlockFi, which included an option to buy.87 FTX had previously
shown interest in Celsius in July, but an examination of the company’s financials then scared it away.

On November 11, 2022, FTX, once valued as high as $32 billion, filed for bankruptcy.88 On December 13,
2022, the US Department of Justice charged Bankman-Fried with “defrauding customers of FTX.com,
investors in FTX.com, and lenders to Alameda Research.”89 Almeda Research was a quantitative trading firm,
not unlike a hedge fund privately held by Bankman-Fried. According to one report, Bankman-Fried started
FTX in 2019 to bring in revenue to fund Almeda.90 It was alleged that Bankman-Fried used customers’ deposits
in FTX to prop up Almeda. In December 2023, the US Securities and Exchange Commission (SEC) filed civil
charges against Bankman-Fried. In its press release, the SEC wrote,

…Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed
diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund;
(2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing
Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting
Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from
FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated
tokens.91

In early January 2023, New York’s attorney general filed a lawsuit against Mashinsky accusing the former
CEO of defrauding investors. In the filing, the attorney general’s office wrote,

Mashinsky promoted Celsius as a safe alternative to banks while concealing that Celsius was actually
engaged in risky investment strategies…. In hundreds of interviews, blog posts, and livestreams,
Mashinsky promised investors high yield with minimal risk, assuring them that their digital assets would
be as safe as money in a bank and that Celsius would always act in investors’ best interest. Touting
himself and his company as a modern-day Robin Hood, Mashinsky boasted that Celsius “deliver[s]
yield…to the people who would never be able to do, [and] we take it from the rich…” He told investors
that Celsius would generate sustainably high returns by making low-risk collateralized loans to first-tier
institutions and cryptocurrency exchanges as well as overcollateralized loans to retail borrowers. These
promises were false–but proved wildly popular…. But as Celsius grew larger, it struggled to generate
enough revenue to pay the promised yields on investors’ deposits. In search of revenue, Celsius moved
into significantly riskier investments, extending hundreds of millions of dollars in uncollateralized

86 Sophie Shulman, “‘So, Celsius Collapsed. Lehman Also Collapsed and the Economy Didn’t Stop,’” CTECH, September 11, 2022,
https://www.calcalistech.com/ctechnews/article/bj100114jlj (accessed Oct. 2, 2022).

87 Ryan Browne, “Bitcoin Billionaire Sam Bankman-Fried Bails out Embattled Crypto Firms BlockFi and Voyager,” CNBC, June 22, 2022,
https://www.cnbc.com/2022/06/22/sam-bankman-fried-rescues-crypto-lenders-blockfi-voyager.html (accessed Oct. 2, 2022).

88 Emily Stewart, “FTX’s Implosion and SBF’s Arrest, Explained,” Vox, December 13, 2022, https://www.vox.com/the-goods/23451761/ftx-sam-
bankman-fried-arrest-bankrupt-bitcoin-alameda (accessed Jan. 23, 2023).

89 “United States v. Samuel Bankman-Fried, a/k/a “SBF,” 22 Cr. 673 (LAK),” The United States Attorney’s Office, Southern District of New York,
January 9, 2023, https://www.justice.gov/usao-sdny/united-states-v-samuel-bankman-fried-aka-sbf-22-cr-673-lak (accessed Jan 23, 2023).

90 Matthew Goldstein et al., “How FTX’s Sister Firm Brought the Crypto Exchange Down,” New York Times, November 18, 2022,
https://www.nytimes.com/2022/11/18/business/ftx-alameda-ties.html (accessed Jan. 23, 2023).

91 “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX,” SEC Ligation Release No. 25616,
January 19, 2023, https://www.sec.gov/litigation/litreleases/2023/lr25616.htm#:~:text=filed%20Dec.%2013%2C%202022),the%20CEO%20
and%20co%2Dfounder (accessed Jan. 23, 2023).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.sec.gov/litigation/litreleases/2023/lr25616.htm#:~:text=filed%20Dec.%2013%2C%202022),the%20CEO%20

https://www.nytimes.com/2022/11/18/business/ftx-alameda-ties.html

https://www.justice.gov/usao-sdny/united-states-v-samuel-bankman-fried-aka-sbf-22-cr-673-lak

https://www.vox.com/the-goods/23451761/ftx-sam

https://www.cnbc.com/2022/06/22/sam-bankman-fried-rescues-crypto-lenders-blockfi-voyager.html

https://www.calcalistech.com/ctechnews/article/bj100114jlj

Page 14 UV8663

loans, and investing hundreds of millions of dollars in unregulated decentralized finance platforms.
When Celsius suffered losses on risky investments, Mashinsky failed to disclose these losses to
investors. Instead, he continued to promise and pay high yields to attract new deposits and to tell
investors to keep their cryptocurrency with Celsius which, he continued to promise, would invest it
safely and pay better returns than the banks.92

In January 2023, there appeared to be no foreseeable end to the crypto winter. What it all meant to DeFi
and the democratization of financial services was a large unknown. Was DeFi just something that was simply
theoretical and not practical? Could it survive? What changes were necessary? And who owned those changes?

92 New York Attorney General’s complaint against Alex Mashinsky, Supreme Court of the State of New York, January 5, 2023,
https://ag.ny.gov/sites/default/files/mashinsky_complaint (accessed Jan. 23, 2023).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://ag.ny.gov/sites/default/files/mashinsky_complaint

Page 15 UV8663

Exhibit 1

Crypto Winter Buries Celsius Network and Batters DeFi

TVL (Total Value Locked) Worldwide across Multiple DeFi Blockchains:
November 2018 to June 26, 2022

Source: “TVL (Total Value Locked) across Multiple Decentralized Finance (DeFi) Blockchains from November 2018 to June 26,
2022,” Statista, 2022, https://www-statista-com.proxy01.its.virginia.edu/statistics/1272181/defi-tvl-in-multiple-blockchains/
(accessed Nov. 1, 2022).

Exhibit 2

Crypto Winter Buries Celsius Network and Batters DeFi

Top 12 Cryptos by Market Cap on September 23, 2022

Currency USD Billions
1 Bitcoin (BTC) $367.3
2 Ethereum (ETH) $161.9
3 Tether (USDT)* $68.0
4 USD Coin (USDC) $49.8
5 Binance Coin (BNB) $44.2
6 Ripple (XRP) $25.2
7 Binance (USD)* $20.5
8 Cardano (ADA) $15.7
9 Solana (SOL) $11.4
10 Dogecoin (DOGE) $8.0
11 Polkadot (DOT) $7.2
12 Dai (DAI)* $6.9

* Stablecoin.

Source: “Biggest Cryptocurrency in the World—Both Coins and Tokens—Based on
Market Capitalization on September 23, 2022,” Statista, September 23, 2022,
https://www.statista.com/statistics/1269013/biggest-crypto-per-category-worldwide/
(accessed Oct. 14, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.statista.com/statistics/1269013/biggest-crypto-per-category-worldwide

https://www-statista-com.proxy01.its.virginia.edu/statistics/1272181/defi-tvl-in-multiple-blockchains

Page 16 UV8663

Exhibit 3

Crypto Winter Buries Celsius Network and Batters DeFi

Terra Network Tokens: TerraUSD (UST) and Luna (LUNA)

TerraUSD(UST) was a stablecoin that used a smart contract-based algorithm to keep its price anchored to
$1 by burning (permanently destroying) LUNAs in order to mint (create) new TerraUSD (UST)s. In the Terra
ecosystem, users could swap the LUNA for UST, and vice versa, at a guaranteed price of $1 regardless of their
market price at the time. If demand for UST and its price rose above $1, LUNA holders could bank a risk-free
profit by swapping $1 of LUNA to create one UST (which due to a rise in demand in this example, was worth
more than $1). During the swapping process, a percentage of LUNA was burned (permanently removed from
circulation) and the remainder was deposited into a community treasury. Funds in the treasury were then used
to invest in applications and services that expanded the utility of the Terra ecosystem. Burning a percentage of
LUNA tokens reduced the number of overall tokens in circulation, making them scarcer and, therefore, more
valuable. Minting more UST had the effect of diluting the existing tokens in circulation and bringing the overall
price back down to its $1 level. Similarly, if demand for UST was low and its price fell below $1, UST holders
could exchange their UST at a ratio of 1:1 for LUNA–which was worth more because of their scarcity and so
the user could bank another risk-free profit.

Source: Krisztian Sandor, “What Is LUNA and UST? A Guide to the Terra Ecosystem,” CoinDesk, May 9, 2022, https://www.coindesk.com/learn/what-
is-luna-and-ust-a-guide-to-the-terra-ecosystem/ (accessed Oct. 1, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.coindesk.com/learn/what

Page 17 UV8663

Exhibit 4

Crypto Winter Buries Celsius Network and Batters DeFi

TerraUSD (UST) and LUNA Price Movement (in US dollars): August 11, 2021, to May 11, 2022

Sources: Adapted from “TerrraClassicUSD,” CoinMarketCap, 2022, https://coinmarketcap.com/currencies/terrausd/; and “Terra Luna
Classic (LUNC),” CoinGecko, 2022, https://www.coingecko.com/en/coins/terra-luna-classic (accessed Dec. 18, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://www.coingecko.com/en/coins/terra-luna-classic

https://coinmarketcap.com/currencies/terrausd

Page 18 UV8663

Exhibit 5

Crypto Winter Buries Celsius Network and Batters DeFi

Tether (USDT) and Bitcoin (BTC) Prices (in US dollars): October 1, 2021, to September 29, 2022

Source: Adapted from “Tether,” CoinMarketCap, 2022, https://coinmarketcap.com/currencies/tether/ (accessed Oct. 1, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://coinmarketcap.com/currencies/tether

Page 19 UV8663

Exhibit 6

Crypto Winter Buries Celsius Network and Batters DeFi

Celsius (CEL) Price (in US dollars): October 2, 2018, to October 1, 2022

Source: Adapted from “Celsius,” CoinMarketCap, 2022, https://coinmarketcap.com/currencies/celsius/ (accessed Oct. 1, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://coinmarketcap.com/currencies/celsius

Page 20 UV8663

Exhibit 7

Crypto Winter Buries Celsius Network and Batters DeFi

Celsius Network Assets and

Liabilities

In millions of US dollars March 30, 2022 July 14, 2022 Change

Assets

Bank Cash $110 $170 $60

Other $520 $450 ($70)

Mining Assets $630 $720 $90

CEL Assets $2,210 $600 ($1,610)

Loans $4,080 $620 ($3,460)

Crypto Assets $14,560 $1,750 ($12,810)

Total $22,110 $4,310 ($17,800)

Liabilities

User Liabilities ($16,540) ($4,720) $11,820

CEL Liabilities ($870) ($210) $660

Other ($4,680) ($570) $4,110

Total ($22,090) ($5,500) $16,590

Surplus (deficit) $20 ($1,190)

USD Reduction in Assets
billions
$12.3 Decline in market value of holdings
$1.9 User withdrawals
$1.9 Loan redemption and liquidation
$0.9 Crypto liquidated by third parties (Tether)
$0.1 Crypto lost from investments
$17.8 Total

Data sources: “Declaration of Alex Mashinksy, Chief Executive Officer of Celsius Network LLC, in Support of Chapter 11
Petitions and First Day Motions,” Case no. 22-10964, US Bankruptcy Court for Southern District of New York, July 14, 2022,
https://pacer-documents.s3.amazonaws.com/115/312902/126122257414 (accessed Nov. 1, 2022); and “In Re Celsius
Network LLC,” Case no. 22-10964, US Bankruptcy Court for Southern District of New York, July 18, 2022,
https://cases.stretto.com/public/x191/11749/PLEADINGS/1174907182280000000001 (accessed Sept. 13, 2022).

For the exclusive use of C. Jimenez, 2024.

This document is authorized for use only by Carolina Jimenez in Fall 2024 – Financial Innovations taught by Florent Rouxelin, Florida International University from Aug 2024 to Dec 2024.

https://cases.stretto.com/public/x191/11749/PLEADINGS/1174907182280000000001

https://pacer-documents.s3.amazonaws.com/115/312902/126122257414

Decentralized Finance

Stablecoins

Asset-linked

Algorithm-based

Risk to the financial system

Lending Platforms

Decentralized

Centralized

Banks Are Not Your Friends

Investing in DeFi projects

Crypto Winter 2022

Crypto’s “Lehman Brothers” Moment

Exhibit 1 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 2 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 3 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 4 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 5 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 6 Crypto Winter Buries Celsius Network and Batters DeFi

Exhibit 7 Crypto Winter Buries Celsius Network and Batters DeFi

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