DeFi Lender Celsius Pauses Withdrawals. Here’s What It Means for Crypto Investors

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Is Celsius about to become the next Terra? 

Key points

• Celsius blames extreme market conditions for its pause on withdrawals, transfers, and swaps.
• The platform’s terms of use say customer assets may not be recoverable in the event of bankruptcy.
• Crypto prices plummeted on the news, which further dented investor confidence.

Crypto prices are in freefall today. Bitcoin (BTC) is down 18% in the past 24 hours and other top cryptocurrencies have fallen even further. The initial price pressure came from higher-than-expected inflation data, and was compounded by Celsius’s announcement that it would pause withdrawals.

Celsius blames ‘extreme market conditions’

Celsius is a popular decentralized finance (DeFi) lending platform that pays high returns on customer deposits. It pays rewards of around 7% on various stablecoins, with higher rewards for certain other cryptos and investors who opt to receive its native CEL token. Celsius was forced to withdraw its product for many U.S. investors earlier this year. 

Celsius announced today that it would halt various transactions. In a blog post, the company said: “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts.” It noted that assets would continue to accrue rewards and stressed that it planned to honor its withdrawal obligations over time. 

For Celsius customers, it isn’t clear when withdrawals and transfers might be reinstated. Celsius warned that there won’t be any quick resolution, saying, “This process will take time, and there may be delays.” In the meantime, Nexo — a rival DeFi platform — has offered to buy certain assets, pointing to a potential Celsius insolvency.

What it means for investors

The most immediate impact for crypto investors is the dramatic price drops across the board. As we start what may be another difficult week for crypto prices, here are two major takeaways for crypto investors:

1. Crypto prices may fall further

Don’t assume that today’s dramatic drops are the end of the crypto bloodbath. The issues that have caused the extreme market conditions Celsius blamed for its problems are not going away. From economic tightening to interest rate hikes and fears of a recession, crypto will continue to face significant headwinds in the near future.

One growing issue is the dent all this has put in consumer confidence. Terra’s collapse had already made investors nervous about these types of platforms. If Celsius — another big name in the industry — also fails, you have to wonder which one might topple next and what impact that might have on prices. This is compounded by the Celsius blog post which asks more questions than it answers. It doesn’t explain exactly what the problem is, and there’s no timeline for a resolution. 

2. Read the fine print

If you have your crypto on a decentralized finance platform, make sure you understand what might happen to your assets if the platform fails. The Celsius release referred to a clause in its terms of use that allowed it to halt withdrawals. The wording is as follows: “Celsius and our third-party partners may experience cyber-attacks, extreme market conditions, or other operational or technical difficulties which could result in the immediate halt of transactions either temporarily or permanently.”

Celsius says the current situation is temporary, but that clause actually allows it to halt transactions permanently in the event of extreme market conditions. There’s no definition of what constitutes those extreme conditions. But given that crypto is an extremely volatile asset, this vague text gives Celsius a lot of leeway. 

Moreover, if Celsius does go bankrupt, there’s more bad news in its terms of use. It says that in the event of bankruptcy or liquidation, various digital assets on its platform may “not be recoverable.” The worst case scenario is that Celsius customers who have money trapped on the platform right now could lose their assets.

Bottom line

We may be in for a bumpy few weeks and months, and Celsius may not be the only crypto platform to face difficulties. Don’t let the potential for high rates of return blind you to the risks of platform failure. Unlike money in a bank account, crypto assets are not protected by FDIC insurance against failure.

Whatever crypto exchange or decentralized finance services you use, now is a good time to find out what might happen if the platform fails. It’s also worth knowing what could trigger similar freezes on asset withdrawal. Consider moving your funds to a crypto wallet you control — it carries different risks and responsibilities, but at least you won’t lose your funds if the platform collapses.