Celsius Network, a cryptocurrency lending company, has seen 2,165% growth in deposits over the past year, although the mechanism that allows these deposits to generate interest is clouded by uncertainties.
According to Celsius CEO Alex Mashinsky, the firm has processed over 160,000 lending transactions and accumulated around $345 million assets under management since it opened its business a year ago. A separate statement from Celsius’ custody partner BitGo also notes that the company has transacted more than $1.5 billion over the past year.
How deposits generate interest
As auspicious as the growth is, there might be issues surrounding the company’s interest generation mechanism and its risk disclosure to users. The company states on its website that Celsius lends the deposits to hedge funds, institutional traders, and exchanges to generate interest. This means that some of the deposits would go to institutions who can put down 50% to 150% collateral based on their balance sheets, according to Mashinsky.
However, what has not been made clear to Celsius’ users is that “lending to exchanges” also implies that Celsius lends directly to customers on some exchanges through their peer to peer margin trading program, as confirmed by Mashinsky to The Block. In this case, the exchanges determine how much collateral they take from margin traders, and the loans these exchanges issue to traders are provided by individual exchange users or institutional lenders like Celsius. In this way, margin traders’ default risks are solely covered by exchanges. However, it also means that if anything happens to the exchanges themselves, lenders, including Celsius, may face default risks as well.