Custodian Prime Trust has warned crypto lending company Celsius Network 30 days to quit its service because of “red flags,” according to individuals informed of the matter.
Prime Trust stated that it had terminated its deal with Celsius. It would disable API (application interface programming) access to its custodial platform after the notification period expired but failed to elaborate. They stated in a message that their partnership with Celsius Network has come to an end due to various commercial factors. The collaboration lasted a little more than a year, but they didn’t reveal much more than that, save to hope Celsius well in its endeavors.
Celsius works the same way as a bank does, receiving crypto deposits from one group of clients and borrowing cryptocurrencies and dollars from another. The debtors have pledged other crypto assets as collateral. Since March 2020, the company has held assets for certain of its clients at Nevada-based Prime Trust.
According to a person familiar with the matter who requested not to be revealed given the matter’s sensitivity, Prime Trust’s risk team was worried about Celsius’ method of continually re-hypothecating assets. Re-hypothecation is a practice in which banks and brokers use assets provided as collateral by their clients to benefit their purposes. When misused, reusing collateral from one lending transaction to support future loans results in an unclear and potentially risky type of financial derivative.
Celsius Reacts
A Celsius representative vehemently denied the charges of re-hypothecation. According to the spokesperson, Celsius has never re-hypothecated its clients’ crypto assets since it served New York consumers. Regrettably, the level of service provided to their New York clients through their relationship with Prime Trust fell short of the expectations that Celsius users have come to expect. Thus Celsius will go forward with a choice for its New York customers.
Celsius notes in its terms of service that it may lend, pledge, sell, assign, invest, hypothecate, commingle, utilise, or otherwise dispose of assets and Eligible Digital Assets to counterparties and that it will use its most exemplary commercial and operational measures to prevent losses. According to the terms of service, Prime Trust also manages funds for Celsius clientele in Texas, Washington, and New York. A representative for Celsius did not reply to requests for elaboration.
Re-hypothecation
Mashinsky founded Celsius in early 2018 as a successful entrepreneur who assisted in developing voice-over-internet-protocol (VOIP) technology. Like many others in the crypto space, he advertises his service as a way to democratise wealth. According to a presentation deck obtained by CoinDesk in August 2019, the company’s goal is to provide equitable interest revenue to 7 billion people.
According to individuals acquainted with the issue, Celsius lends out sections of the collateral debtor’s return, which may be troublesome for depositors.
According to one over-the-counter desk dealer, this practice, known as re-hypothecation, has been likened to how subprime loans were repurposed and promoted as mortgage-backed securities and then resold as collateralized debt obligations in the years preceding up to the financial crisis of 2008. As a result of re-hypothecation, which the trader believes many crypto lending platforms are engaging in, many users are exiting loans and shifting to options contracts.
Another source knowledgeable with Celsius’ procedures stated that the lender’s re-hypothecation of loan collateral is another factor why cryptocurrency miners fear taking out loans with the company: they don’t want to be unable to get the coins they mined. In response to worries about collateral rehypothecation, Golovina claimed that Celsius would not divulge their best business practices or the strategic advantage of their company model.
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Both with Fireblocks
According to the company’s statement of the Prime Trust collaboration last year, Fireblocks is Celsius’ other “main” custody provider. The company has been utilising Fireblocks’ services since 2019, according to a case study released on the custodian’s site in October 2020. According to a spokesman for Fireblocks, Prime Trust and Celsius are both Fireblocks clients, and as non-custodial technology suppliers, they do not impose or intervene in their customers’ activities. Similarly, Celsius said it would relocate its operations from the UK to the US, claiming regulatory ambiguity as to the cause.
