The interest rates offered by traditional banks are low, and cryptocurrency lending accounts can pay 18% or even more. Millions of people flock to these products offered by emerging companies, including Celsius Network. With the recent market turbulence, Celsius plunged into a solvency crisis – dealing another blow to the already shaky confidence of the crypto world.
What is Cryptocurrency Lending?
At first glance, a crypto loan account looks like a bank-provided savings account, but in crypto instead of traditional money. An investor opens an account, deposits crypto and earns interest. Many deposit in Bitcoin, while other investors use stablecoins – tokens whose price is usually pegged at $1. Others use lesser known, more volatile cryptocurrencies. The accounts usually pay interest in the same currencies that are deposited. Some have rates that change daily. Others offer a fixed rate and the money is held for a fixed time.
It is still small compared to traditional banking, but it is growing rapidly. Celsius said it had nearly $11.8 billion in deposits as of May 17, while BlockFi Inc. in mid-June announced deposits of more than 10 billion dollars. Gemini Trust Co started offering accounts in February 2021 and said last August it had more than $3 billion in deposits.
Possibility of huge profits?
Companies that provide accounts say they can lend their customers’ deposits to institutional investors at an even higher interest rate. These institutions sometimes need to borrow cryptocurrency to conduct their own transactions, such as to bet that the price of a cryptocurrency will fall or to take advantage of price differences in other financial instruments.
But regulators said they believe some crypto lenders are using the funds for other businesses. Some may be investing client funds in riskier crypto projects, profiting from staking and pocketing the difference. The bottom line is that there is no uniform rule for companies to disclose exactly what deposits can and cannot be used for. The same goes for decentralized finance, or DeFi, tools that also attract crypto investors with their outrageously high interest payments.
How is crypto lending different from DeFi?
Celsius, BlockFi, and other crypto lenders deal directly with their customers and pay them interest.
With DeFi, it can be just some computer code, rather than an intermediary, that manages borrowing and lending and interest payments. Lending cryptocurrencies for interest through DeFi is sometimes referred to as profit farming. That is different from staking, in which cryptocurrency owners authorize their tokens to be used to help order transactions on the blockchain, or digital ledger, used by the coin. there.
What happened to degrees Celsius?
Its latest troubles began after Celsius made a big investment in a staking token called stETH. StETH allows people and companies like Celsius to stake on the Ethereum blockchain and earn additional profits through DeFi.
The value of crypto assets plummeted in May causing stETH trading to drop and the token to become less liquid. That makes it harder for Celsius to raise redemptions when users want to withdraw their coins.
On June 12, Celsius announced it would halt withdrawals because of “extreme market conditions,” an apparent attempt to thwart a bank’s digital equivalents.
What have regulators done about crypto lending?
Regulators and investor advocates worry that consumers don’t understand that they are taking on more risk than they have in a bank savings account. Because crypto accounts are not FDIC insured, customers can lose their deposits if a company goes bankrupt, gets hacked, or loses client funds.
Some account companies first sought approval from US federal regulators, and that led to a backlash. In July 2021, the securities regulators of Alabama, Texas, New Jersey, Kentucky and Vermont launched actions against BlockFi alleging that the company was offering unregistered securities.
Several similar states have already introduced actions against degrees Celsius. Coinbase Global Inc had planned to offer similar accounts but dropped that proposal after the Securities and Exchange Commission said it might company lawsuit.
The Celsius crisis could accelerate a regulatory crackdown. Financial watchdogs seem to regard crypto lenders as one of the most underrated in their efforts to bring law and order to the broader crypto industry. After all, with companies like Celsius and BlockFi, there is an obvious legal entity to sue, which is not always the case in DeFi transactions.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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