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Celsius, a former leading “CeFi” (centralized lending and borrowing) crypto exchange made news this past week for its bankruptcy filing, drawing a spotlight as the latest crypto casualty.
The sharp downturn in the bleeding edge technology sector has exposed a number of projects and ventures that have dealt in negligent or outright corrupt financial practices.
Overleveraging, and undercapitalization are part of the story. Abusing technology in concocting investment returns and asset backing and stabilization are another factor, which helped doom the Luna stablecoin.
But part of the problem is an economic shaking out due to macroeconomic conditions that have severely cut investing on platforms.
Celsius and Voyager were two platforms that focused on attracting investors with the promise of double-digit yields for lending out their crypto deposits.
But even more conservative crypto exchanges have been hit with liquidity problems from reduced investing.
Centralized exchanges including BitPanda, BlockFi, CoinFLEX, and others have signaled problems by limiting withdrawals and/or taking other steps.
Coinbase, one of the most conservative and compliant centralized exchanges, has seen a huge drop-off in activity during the 2022 “crypto winter,” and it’s affecting the company’s bottom line.
Robinhood, a stock trading platform that ventured into cryptos, has seen inflows in both sectors of investment significantly impacted.
Dan Dolev, an analyst at Mizuho Equity Research, said Coinbase’s average trading volume this month will likely tally around 1.2 billion dollars, down from 7 billion in November 2021.
That’s according to Coindesk.com. The drop-off in volume from about 9 percent of the crypto market, to less than 3 percent currently, likely puts Coinbase out of the top ten centralized exchanges.
Gensler Weighs In
SEC Chair Gary Gensler reacted to the downfall of Celsius and several other crypto platforms, with measured comments saying such platforms might be treated in a similar way to traditional brokerages.
In other words, they might be obligated to similar regulations in the event of failure, though he added that regs would probably need to be tailored based on some unique aspect of cryptos.
“Just as there’s difference between asset-backed securities and an equity offering, there may be differences here as well,” Gensler said in an exclusive interview with Yahoo Finance published on 14 July.
Gensler emphasized transparency, saying “The person raising the money and selling you those financial assets ought to not defraud you, ought to give you the information so you can make your decisions.”
Who Owns Your Wallet?
A recent Marketwatch.com story noted that the failures of several centralized lending platforms have “shaken investor faith.”
It seems like a crypto age ago at this point, but Trends In Cryptos featured a story about Celsius and its creative services catering to the “unbanked,” in October of 2021 (“TURNING UP THE UNDERBANKED HEAT WITH CELSIUS”).
The venture and its CEO, Alex Mashinsky, had been prominently featured around that time on the London Real podcast.
Our Trends Journal article emphasized a key question of centralized exchanges that anyone who ventures into cryptos should understand:
“There’s an old (well, as old as cryptos) statement, ‘Not your keys, not your crypto,’ and there are risks when holding crypto on any custodial platform or exchange.”
Quite simply, no one should ever leave large amounts of their crypto holdings on centralized exchanges, unless they are very confident in the entity involved, and their crypto is being kept on the exchange for a compelling reason.
The most conservative option is to hold crypto in a non-custodial cold storage wallet—ie., an offline wallet where you retain and keepsafe the crypto keys.
Several companies specialize in cold storage hardware devices. Ledger and Trezor are two hardware wallets used by many. Arculus also sports useful features.