Drama around “cryptocurrency bank” Celsius is aggravating as cryptocurrency enthusiasts found out how the company fought the potential bankruptcy, and it might surprise you how simple-yet-short-sighted their decision was.
As the document on the NY court’s website suggests, after facing a liquidity crisis, Celsius started offering a double-digit interest rate for attracting more funds that would cover earlier depositors and creditors.
“Faced with a liquidity crisis, Celsius began to offer double-digit interest rates in order to lure new depositors, whose funds were used to repay earlier depositors and creditors” https://t.co/8s2Yo8HH6z
— db (@tier10k) July 7, 2022
Essentially, Celsius asked for more money and offered an even greater interest rate to cover liquidity issues on their previous loans. The scheme used by Celsius for solving the liquidity crisis looks similar to a traditional ponzi scheme, which survives only with constant inflows into it.
Such a decision can help a company in the short term and solve issues with liquidity and the inability to pay out initial deposits. But at a certain point, Celsius will have to repay the interest it is offering today, and it is unclear if the crypto bank will be able to do so considering all the pressure on it.
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Celsius crash recap
During the cryptocurrency market turmoil, Celsius halted users’ withdrawals as the company failed to provide enough liquidity to maintain its operations and fulfill withdrawal requests. The rising tension in the community caused a panic among CEL investors that caused a 50% plunge of the token.
Later on, The Wall Street journal reported that Celsius is facing bankruptcy as the company hired consultants who are aiming to resolve the existing issue as securities officials started investigations into the matter.
Previously, Celsius successfully covered some of the existing loans and withdrew almost 24,000 WBTC from MakerDAO DeFi platform and then transferred some funds onto the FTX exchange.