Whenever I sit in the tube to any destination in London, you'll find a tone of ads for fintechs or decentralized institutions. Funny enough, while reading them I often listen to a podcast mentioning the exact same products.
Especially in the crypto or web3 world I often hear and read things like: We're better than banks, because we don't take such big risks. Web3 is the future because it's decentralized or banks are bad because they're not transparent. All marketing claims, to suck you in and use their products.
If you look at institutions like Celsius, Three Arrows Capital, Voyager or BlockFi, you'll find companies which are in the process of bankruptcy or still trying to figure out how they can save their assets. All of them made the exact or similar claims I mentioned above. None of them held themselves accountable to them.
Thanks to the bankruptcy process, we now get a look behind the scenes of these institutions. For this article, I'll mainly focus on Celsius. You can keep up to date with the case on this site: https://cases.stretto.com/Celsius/.
The first Zoom call took place, where Alex Mashinksy - the CEO of Celsius - and his team of lawyers had to respond to any questions regarding the bankruptcy. They're declaring chapter 11 bankruptcy, where they still try to save the company. A lot of companies have managed to turn things around in the past with chapter 11. Apple Inc. is one of the companies who managed to get out of that slump and emerge from the ashes.
However, reading and hearing the statements from Celsius, makes it pretty clear as to why they won't survive. When the call started they stated, that they were better than a bank, however the more the judge and opposition forced them into how they're better, the more they pivoted and never answered. The more the opposition pressured them for an answer, the further they distanced themselves from their original statements. To the point where Celsius called themselves a mining company and not a lending or borrowing institutions.
This Twitter thread sums up the struggle of that first hearing pretty well:
In it you'll read about how Celsius blames everyone else, expect themselves. Whether it was FUD, Terra or the price drop of Bitcoin. All of it lead to them getting in trouble. One could make the argument, that these events should be calculated into Celsius risk management. Mashinksy doesn't see it that way and believes they did everything right. In fact they seemed to have done everything so right, that they left a $1.2 billion hole in their balance sheet.
This is the problem with all these CeFi institutions. People hyped them up thanks to clever marketing and forgot to check, whether the yields they are proposing are from trading, which Celsius apparently was doing as well, or from risky DeFi protocols such as Terra's UST.
DeFi in itself faces two problems: It doesn’t provide any security for beginners. There is no regulation or direct line for you to call. You have to know what you invest your money into. Technically everything is safe and store in a smart contract, however this is the second danger. These smart contracts were written by humans, which in itself can cause more problems down the line.
Therefore these CeFi platforms didn’t essentially lie, when they promoted how they’re different from a bank, as they invested into DeFi, however they didn’t differentiate themselves, when the money stored their clients accounts weren’t backed. Just as a bank, most of their clients assets were lent out to risky third parties.
As you know by now, I’m a Bitcoin enthusiast and encourage people to hold their own keys. Don’t trust, verify is one of the Bitcoin sayings out there. Which is one, we all should take closer to heart. Especially with what’s been going on with these CeFi platforms. I bet many people would have never invested, if they would have known how risky the whole operation is. Most of these platforms are able to give you such high yield, because they risk a lot. Either through day trading assets or investing into liquidity pools like Anchor.
Nothing in the financial world is risk free, however expecting to park your savings in one institution and profiting of them for a life time is a silly bet. Unfortunately one, many people took upon themselves. They’re the ones paying the price now, as they have to follow these court hearings and hope for some of their money to be refunded.
These events leave a bitter taste in the mouth of many investors. Bot retail and commercial. The fact that these CeFi companies aren’t any different than a bank but still promote the ‘future of finance’ in the crypto or web3 sector is one of the many reasons most of them felt for them. This is where clear guidelines, strict rules and regulation for the advertisement of these institutions could have prevented a lot of harm.
However, I believe in silver linings and see many positives out of this crisis. The most obvious is, how many people jumped on the ‘don’t trust, verify’ train. Sales for hardware wallets went up, people started researching and learning more about self custody and generally the trust towards central institutions is shrinking by the day. Just as Satoshi initially planed with his release of the Bitcoin white paper.
I hope some of you reading this were not affected by Celsius, Voyager or whoever. If you still struggle and rely on the CeFi space, hit me up and let’s see how I or the Bitcoin community as a whole can help you!