The case of Celsius Network has drawn attention in the cryptocurrency ecosystem, because many users see their funds in danger due to the liquidity crisis facing the platform. This bears a certain similarity to what happened in 2008, with the mortgage crisis that arose in the United States.
According to a analysis conducted by Michael P. Regan for the Bloomberg news agency, the main point in common between both events is the decision to “remortgage” the collateralized assets in loans, whether they are cryptocurrencies or houses.
The platform for investments and loans with bitcoin (BTC) Celsius reported on Sunday, June 12, that it was suspending fund withdrawals for your users. This is due, as reported in CriptoNoticias, to a set of factors that, in a bearish market context, compromised the company’s liquidity.
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For example, the drop in the price of the synthetic ether (ETH) token stETH, issued by the Lido staking pool, was one of the possible causes, given that Celsius had 445,000 stETH in his possession.
Also, since Celsius used the funds of its users to invest in other protocols and generate income, BTC price decline led to its collateral being liquidated on some lending platforms. To prevent this from happening, the company had to deposit more collateral on platforms like MakerDAO, issuer of the stablecoin DAI (DAI).
For its part, the mortgage crisis of 2008 consisted of a very large growth in mortgage loans in United States. People requested them to take advantage of the low interest rates that the State determined to boost consumption after the September 2001 attacks.
Nevertheless, mortgage banks ended up giving loans to people who couldn’t pay them. Even many loans had a variable interest rate, so in 2006, when the rate went up again, they could not meet their debts. This led to an increase in sellers, which multiplied the supply of houses on the market and, therefore, decreased the value of the properties.
One of Michael Regan’s arguments is based on the fact that in Terms and conditions of use of Celsius (precisely, point 13 “Consent for the use of digital assets”) determine that the user gives permission to the platform to “mortgage and remortgage”, among other actions, the digital assets that you deposit there.
Furthermore, it is clarified later in that same article that if Celsius goes bankrupt, users could lose the funds they entrusted to it. It even clarifies the possibility that these affected people “have no legal rights” to claim against this eventual scenario.
In the mortgage crisis of 2008, One of the factors that unleashed the collapse of the real estate sector was precisely that “remortgage”. To put it in concrete terms, when applying for a mortgage loan, a person asks a bank for money by putting their house as collateral.
A “remortgage” would consist of the bank using that collateral (the house) as collateral before another financial institution. This other entity could, in turn, do the same. In this way, a chain effect is generated that, in the event of a possible fall in the value of the collateralized asset, would seriously affect many actors in the economic sector.
In the mortgage crisis in 2008, the problem was that many companies took those collaterals as shares to trade them in the stock market. But the collapse of the market and the subsequent fall of that house of cards were not seen coming.
Something similar happened to Celsius. The collapse of the price of cryptoactives such as bitcoin and ether generated serious liquidity problems that, in turn, almost ended in the liquidation of their positions with other lending platforms.
The Celsius case cannot be solved in the same way
How did the crisis of 14 years ago end? First, The Federal Reserve approved a rescue plan for the main mortgage entities from the United States. Fannie Mae and Freddie Mac, the two largest, passed into state hands.
Also, USD 3.9 billion was allocated to help those affected by the crisis. Other control and relief measures by the government followed later to have a positive effect on the markets.
However, with Celsius something like this will not happen. First, because it is a crisis of a single company and not of an entire economic sector as in 2008. On the other hand, nations do not have emergency plans that they can apply to cryptocurrency companiesalthough the UK Treasury is planning a strategy in this regard, as this newspaper reported.