Celsius had higher risk profile of traditional banks2 min read
While Celsius CEO Alex Mashinsky claimed the company was “not taking any risks,” a recent report in The Wall Street Journal refutes that claim. According to the report, the cryptocurrency lender had more than twice the risk profile of the average American bank. In addition, the article claims that Celsius took on more risk than traditional banks.
The revelations are based on investor documents from Celsius, which revealed that the cryptocurrency lender was almost twice as leveraged as traditional US banks.
Celsius high risk profile
Before raising new funds last year, Celsius had approximately $19 billion in assets on top of $1 billion in equity. That put its asset-to-equity ratio – seen by regulators as an indicator of risk – at 19:1.
Meanwhile, traditional US banks have an average asset-to-equity ratio of around 9:1.
That is, the risk of Celsius was twice that of regular banking services at the time of data collection.
Furthermore, documents from The Wall Street Journal allegedly show that Celsius was selling loans with insufficient collateral.
The lender, for example, required commercial borrowers to post about 50% collateral for their loans. The report claims that Celsius used the guarantee to borrow even more money.
What Celsius CEO Said
The revelations run counter to Mashinsky’s claim that the company had not made loans with insufficient collateral.
The executive also stated repeatedly that his company took significantly lower risks than the banks. At the same time, it provided significantly higher returns for its depositors.
In July 2020, for example, he told CoinDesk that “Celsius does not make unsecured loans.” This is because “that would be taking too much risk” on behalf of its depositors.
On July 13th Celsius suspended all customer withdrawals, exchanges and transfers. The team cited “unfavorable market conditions” as a reason for the action, but did not elaborate.
The move came amid a significant price decline in the crypto market. As a consequence of this, the company was unable to honor customer withdrawals due to liquidity problems.
Less than a week after the withdrawals stopped, the Texas State Securities Council, in the US, opened an investigation against the company.
Joseph Rotunda, director of enforcement for the council, said this investigation is a priority:
“The team met and began investigating the account freeze on Monday morning,” he said.