Stablecoin Collapse Sent Voyager Digital and Celsius on Different Paths to Bankruptcy

When Celsius Network became the second crypto lender to enter bankruptcy Wednesday (July 13) it looked from the surface like the last of the big dominoes set up by the $48 billion collapse of a poorly designed stablecoin had fallen.

In the past few weeks, lender Voyager Digital entered Chapter 11, competitor BlockFi cut a deal that may or may not see it acquired by crypto billionaire Sam Bankman-Fried’s FTX exchange at more generous terms than were required, a number of large cryptocurrency firms lost small fortunes, and the hedge fund founders whose reckless bets on decentralized finance (DeFi) are missing and many reports say they may be on the run.

And while the dominoes can all be traced to the terraUSD algorithmic — meaning not fiat-backed — stablecoin’s run to virtually worthless in a single week in May after losing its dollar peg, Celsius is something of an outlier on the crypto lender insolvency front.

See also: Push to Regulate Stablecoins Gains Momentum as TerraUSD Spirals

The thing is, all of the others bet on a hedge fund, Three Arrows Capital, that made complex and too-risky DeFi bets in search of outsized returns. In the case Celsius, it did the reckless DeFi betting itself — and was taken down by a depegging.

Meanwhile, an industry whose questionable lending practices and apparent willingness to forego due diligence is getting a long overdue reality check.

Read more: Reckless Crypto Lending, Opaque Operations Paved Voyager Digital’s Path to Bankruptcy

“Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” Nic Carter, a partner at blockchain-focused Castle Island Ventures, told CNBC earlier this week.

Bankman-Fried’s FTX tried to bail Voyager out with a $500 million line of credit that proved to be too small, whereas a $250 million line of credit to BlockFi has managed to keep it out of bankruptcy, although Bankman-Fried may walk away with the firm.

Three Arrows, Seven Hits

Along with lenders Voyager Digital and BlockFi, which loaned Three Arrows $650 million and $250 million, respectively, the exchange Blockchain.com recently revealed it is in for $270 million, and Genesis, FTX, BitMex and Derebit were all hit.

The immediate cause of Three Arrows’ collapse was a huge investment in LUNA, the partner token that terraUSD used to keep its peg to the U.S. dollar in an incentivized arbitrage mechanism.

See also: $45B Stablecoin Rout Confirms Worst Fears about Crypto’s Need for Reserves

The exchange’s exposure to Three Arrows varies greatly with firms like Blockchain.com in for $270 million, while BitMEX is only owed $6 million

The Boiling Point

However, Celsius also lost big on another cryptocurrency that did not maintain its peg — even though it wasn’t a stablecoin.

The culprit was a token called “staked ether,” with the exchange symbol stETH.

The stETH was given out by Lido, a firm that invested in staking the Ethereum blockchain’s still-in-development Ethereum 2.0 blockchain, which will be more scalable and environmentally friendly than its current Bitcoin-style proof of work (PoW) blockchain. As it requires a minimum 32 ether — more than $38,000 at today’s prices — investors turned to Lido.

The problem came when stETH, which was supposedly usable and tradable like ether, began to lose parity with the No. 2 cryptocurrency.

Celsius had a liquidity crunch as too many investors tried to withdraw the ether they had deposited — with a promise of large returns. With at least $475 million invested, if Celsius started dumping stETH, the peg would fall further. Unable to meet demand Celsius froze withdrawals.

The lender’s problems also have another set of victims. Celsius issued its own token, CEL, which is down 40% since the collapse of the Terra/LUNA stablecoin ecosystem that started it all. Borrowers were offered better rates if they invested CEL with Celsius rather than other cryptocurrencies — which benefitted Celsius as its founders owned most of the outstanding CEL, and people buying it to invest in Celsius supported its price.

Now, the Financial Times reported on July 13 that their executives are facing allegations that they were making millions selling CEL, while they were publicly promoting it.

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