The focus of this article is the Celsius review. In our previous blog article, we analyzed the crypto lending market. This article here will review the Celsius crypto lending platform based on our crypto lending analysis framework from this previous article.
- I Will give a short overview of the crypto lending market
- Celsius review (Business Model, Risk Analysis, Features Analysis) will follow
- After that, we will focus on the Celsius regulatory analysis
- In the end, we will look at the difference between Celsius and SmartCredit.io
What is the crypto lending market?
Crypto lending means that users receive cryptocurrency assets in exchange for a certain interest rate. Most of the platforms that provide crypto lending use the Peer-To-Peer credit system. This system means that many borrowers and lenders present their offers to each other within the same credit market simultaneously. In such a market, the matching offers in terms of loan rates are completed, and the loan transaction takes place without any intermediaries.
Now, we will look into the following on the market dynamics.
Crypto lending market segmentation
There are 3 main channels for crypto lending:
- Crypto Exchanges margin lending/borrowing. Crypto exchanges are the biggest player in the lending market, with the margin lending/margin borrowing for the traders.
- Custodial Lending Platforms (Nexo, Celsius, Genesis Capital) – they control your private keys (i.e., they control your assets). Some of them lend fiat (Nexo), and the others lend crypto (Celsius). Sharing your own private keys, not to be the only one who controls your assets or benefiting from only fiat exchange within the crypto lending process, is a disadvantage for you. This is because while keeping your key private, you buy the security of your money.
- Non-Custodial Lending Platforms (Maker, Compound, Ethlend, SmartCredit.io) – they do no control your private keys (i.e., they do not control your assets). The assets are kept in the smart contracts, which are un-accessible for the platforms. These smart contracts define when the collateral is moving back to the borrower or not. That’s the huge difference between segment (1) and segment (2), which control client assets.
What is the difference between these three?
- Borrowers and lenders can review the order book on P2P-based platforms and where users can freely offer loans to each other. There are existing offers in the examined order book. Some of these offers can be approved, and some can be set aside.
- You will be the only person who controls your assets while trading on systems such as Smart.io. Nobody but you can access your Private key, so all the cryptocurrencies you own are fully secured.
- Thanks to non-custodial lending platforms, individuals who give loans can obtain tokens within the framework of the loan amount. The token obtained enables users to offer loans without having liquidity problems -and of course, to pay third parties easily and securely, without losing one’s value of money.
- Users can set interest and collateral rates for the loans they will give. Those who will receive loans can determine the interest and collateral rates they demand. Non-custodial platforms that offer completely free liquidity in the crypto world offer a transferrable and tokenizable credit experience.
- Additional options such as community protection funds within non-custodial platforms ensure that your assets, interest rates, and collateral rates are protected.
Key use cases for the crypto lending
- Using loans for trading – ca 80% of the market will feed into the crypto exchanges. Traders use their collateral to get the loans because either the crypto exchanges do not support these collaterals or traders get better terms via crypto lending.
- Liquidity creation – instead of selling crypto, which in most countries would be a taxable event, the users would rather monetize their crypto assets via using them as collateral for the loans. This is approximately 15% of the market.
- Crypto economy – borrowing crypto for using it in the crypto-sphere – 5% of the market
We estimate the market size of custodial and non-custodial lending platforms ca 20 Billion USD.
- Graychain estimated in Q2 2019 the crypto lending market size as 4.7 Billion USD (Source: https://reports.graychain.net/TheCryptoCreditReport-q2-2019.pdf)
- Celsius has originated loans for 4.25 Billion USD in 2019 (Source: https://www.prnewswire.com/news-releases/celsius-hits-4-25-billion-in-originated-crypto-loans-setting-the-bar-for-crypto-lending-industry-300956493.html)
- Genesis Capital did loans of 3.1 Billion USD in 2019 (Source: https://genesiscap.co/insights/q4-insights-2019/)
This results in approximately 20 Billion USD market size in 2019.
Celsius Review – Business Model
Coin loan business
Celsius has ca 106’000+ users. These users store their crypto assets into the custodial Celsius wallets – Celsius has access to these assets.
Celsius is then taking these assets from the wallets, pooling them together, and lending them to the institutional investors. These institutional investors are borrowing the crypto assets either for trading or for hedging their portfolios. There are ca 200+ institutional investors, which are borrowing from Celsius.
Some of the institutional borrowers (traders) are interested in the volatility of the assets. They borrower assets, they sell them, and they repurchase them at a lower rate. They return the assets to the lender, plus they pay the interest as well.
Celsius earns 6%-15% interest (APR) from the institutional investors and gives from this 80% to its users. Celsius keeps the other 20% of the interest as a service fee. This translates to a 1.2% – 3% service fee from the funds borrowed, which is slightly higher than on other crypto lending platforms.
This business model does not mean that the lenders (the platform users) receive a 6% – 15% interest payment per year because, most of the time, the funds are not lent out. This interest is paid only for the time when the funds are lent out.
This business model looks like a prime-brokerage business in traditional finance, where it serves mainly the institutional traders/hedge funds. However, it is a prime brokerage business, where the retail investors are investing their funds.
The prime-brokerage business is paying high-interest rates in traditional finance; it’s because the risk of this business is high. The transparency is rather missing as most of the transactions are client-specific OTC (Over The Counter) transactions.
Interest rates in Celsius are just 1% APR. Moreover, users can enjoy a flexible lending experience with the following additional options:
- Individuals who own Collateral can provide loans as little as $ 1000.
- It is possible to complete the loan process without any paperwork. You can get loans on Celcius in just a few minutes.
- Your approval takes place without a credit check, no origination fee, and our automated process during the process.
- You can specify how many loans you have requested through the automatic system, and you can calculate the correlated rate to be requested from you in the system.
- If you wish, you can make transactions on cash or cryptocurrencies.
Why Should I Prefer Crypto Lending Instead of Selling Crypto Money?
- Putting crypto money into the credit process instead of selling crypto money means not giving up the benefits that money will give you later -do not let them go. At the same time, the market values are that much advantageous! Therefore, it may make more sense to give it credit rather than sell it.
- Accessing cash without cashing out will allow you to earn higher rates.
Since the existing crypto money holding will give you extra financial power, you will have the chance to get extra crypto money.
- The Crypto money lending process starts with a term process of 6 months.
- It is possible to say that loan values are extremely flexible.
- Crypto lending will enable free transactions on your money with the financial freedom cryptocurrencies offers.
Dollar loan business
Celsius has built the dollar loan business additionally – he lends fiat against the crypto collateral. Users deposit their collateral at the beginning of the loan, and they have to pay interest at the end of the loan.
Celsius uses the re-hypothecation – user collateral assets are not locked into the smart contracts or the hardware vaults, but they are “recycled” – Celsius lends the collateral out and earns additional interest on this.
Celsius Business Model Summary
We can describe the Celsius Business Model as following:
- Lenders (Depositors) submit their crypto/fiat funds into the Investment Pool.
- OTC borrowers are borrowing from the Investment Pool
- The collateral of OTC borrowers is stored in the Collateral Pool. OTC borrowers can borrow from Collateral Pool too
- Celsius takes 20% of the interest payments as a service fee
The Celsius token values as following:
Celsius was selling lately 10% of equity for 12 mUSD via the BnkToTheFuture platform. This translates into a 120 mUSD valuation of Celsius equity, which makes 1132 USD per Celsius user.
Celius earns the revenues as service fees – it takes 20% from the interest payments. Celsius has paid in the last 18 months in total 14 mUSD interest to the borrowers. This means the revenues in the last 18 months were 14 / 80 * 20 = 3.5 mUSD revenues. This makes per the last 1 year 2.33 mUSD revenues. Does this justify a 120 mUSD equity valuation? Let’s calculate this with the DCF model.
Here are the input parameters:
This valuation is justified when the company operating income will grow annually by 74% in the next 5 years. This might be a little bit over-optimistic. However, if we factor in expected Bitcoin and crypto markets price appreciation, this might look like a reasonable valuation.
However, we did this calculation with the 15% discount rate. The investors in this equity would expect probably a higher return than the 15%, probably rather than 30%. This would translate into even higher required yearly growth (102% annually).
We assumed that Celsius is cashflow positive and that operating income is 20% of the revenues. This might be so for the established companies. However, that’s probably not so for the fast-growing companies, which are in continuous need of cash.
This implies the current Celsius valuation is looking more like a good deal for the Celsius than for the investors.
Celsius Review – Statistics
In the last 18 months, Celsius has done:
- 5.47 Billion USD crypto loans in 2019
- 120 Million USD fiat loans
- 610 Million USD Assets under Management (AuM)
- 25 coins are supported
This data is based on the Celsius presentation in the BnkToTheFuture.
Here is the overview of current interest rates (at 12th of July 2020) in Celsius and other lending platforms:
Btw, the current “Lend rates” for USDT are higher than the “Borrow rates.” This is so because Celsius lends out the borrower’s collateral as well. The lender earns from the borrower’s interest, and the lender earns from the interest for the borrower’s collateral lending.
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Celsius review – Platform Analysis
Custodial Crypto Lending – Celsius is a custodial platform; it controls client assets. It not only controls client assets, but it actively manages client assets – it lends the depositors crypto assets, and it re-hypothecates the borrower’s collateral assets. -Unlike Smarttoken.io. Smartmoney.io never asks for your private key and never has control over your assets.
Risk Analysis – The key risks are related to the custodial assets (see later) and the regulatory implications (see later)
Fiat loans – Celsius is providing fiat loans against crypto collateral
Crypto loans – Celsius is providing crypto loans against crypto collateral (with a focus on the institutional clients, whose business is mainly earning profits via shorting underlying assets)
Crypto Credit Score – There is no evidence of credit scoring; the credit risk management is based on the crypto-collateral only and partly on the OTC contracts (but there is no transparency over this)
Money Market Fund – Celsius offers money market fund functionality, where the crypto depositors will earn interest in their holdings. Clients’ holdings are lent to the institutional investors, which are short selling the assets. Celsius earns interest for lending and distributes the interest into the client wallets.
Fixed Income Fund – Not available per client basis. However, Celsius is doing all the investment management behind the scenes (lending to the institutional borrowers to short the coins/the market). We can see this in the following way – Celsius manages one fixed income fund herself and distributes the profits pro-rata to the custodial wallets (investors). By using this analogy, we see that Celsius looks rather like a crypto fixed-income investment fund (unregulated at the moment)
Variable interest rate daily loans – interest rates are fixed every week (based on the shorting demand from the institutional investors – more shorting demand results in the higher interest rate and vice versa). Interest payments to the custodial accounts are made beginning every week.
Low collateral ratio – It’s not clear which collateral ratios are used for the institutional borrowers. These are OTC (Over The Counter) trades; no transparency is available on them.
A low collateral ratio is important for the borrowers – if the borrower has a low collateral ratio, the borrower can borrow more on his given asset basis. See more in “Why borrowers need low collateral ratio?“. A low collateral ratio makes the crypto loans more attractive for the borrowers. As the borrowers drive the market, then this is the key feature for the borrowers. See more in the “Why is the collateral ratio so high in DeFi?”
Large choice of collateral – Celsius offer support for 25 different coins
API – Custodial platforms cannot provide Credit As A Service API’s – because all assets have to be transferred into their platforms first. Just imagine a wallet provider, which would integrate Celsius API – the users of this API would have to transfer their assets first to Celsius custodial accounts. However, this would defeat the business case of the wallet provider … This is a general handicap of custodial crypto lending business models.
Loan Transferability – Custodial platforms do not offer loan transferability.
Regulations – see below
Celsius review – Risk analysis
Celsius is using BitGo multi-signature wallets. BitGo has insurance of 100 mUSD on the assets, which are managed via BitGo. Let’s look at this in detail:
- Celsius says it has 100 mUSD assets insured. However, this insurance is not per BitGo client, but for all BitGo clients. If, for example, the BitGo client A is getting hacked for 30 mUSD, and let’s assume after that client B is getting hacked for 120 mUSD the next day, then client B will receive only 70 mUSD (100 – 30)
- The assets above 100 mUSD are not insured as Celsius has not ordered any additional insurance from BitGo (BitGo clients can do so)
- BitGo insurance applies only if:
- Assets are kept in the BitGo cold wallet; insurance does not apply to the hot wallet.
- All private keys are controlled by the BitGo team (Celsius shall not have any keys to the cold wallet)
- Transfer transactions from cold wallet to other addresses take ca 24 hours – these transactions are executed by following special operating procedures by the BitGo team.
The lending business is inherently connected with the transfer of the assets (of underlying and collateral). Celsius is custodial, but he cannot keep all assets in the cold wallet:
- If Celsius is providing fiat loans against crypto, then these crypto assets can be in the BitGo cold wallet.
- Assets sitting idle (not lend out) in the Celsius wallet can be in the BitGo cold wallet.
- But crypto assets used for earning interest cannot be in the cold wallet – because these assets will be lent out to someone else and transferred to someone else.
As a summary – the insurance is cumulative over all BitGo clients and applies only for the assets kept in the BitGo cold wallets, but not on the actively managed assets.
Celsius has 610 mUSD Assets under management. This implies that perhaps 10% of them are insured at best.
Re-hypothecation of crypto assets
Re-hypothecation means that the service provider is using the client’s assets for earning additional revenues. BlockFi crypto lending platform states, for example, that it uses re-hypothecation. For example, BlockFi can use the borrower’s collateral and lend it further (and earn additional interest via this).
Re-hypothecation works fine in a positive scenario. The issues will appear when something in the re-hypothecation chain fails. If a lending platform is lending first borrowers’ collateral to the next borrower, which will default – what will happen then?
Celsius is doing re-hypothecation. It looks like sometimes the Celsius lending interest rates are higher than the borrowing rates. That’s possible because of the re-hypothecation of borrowers’ collateral, which allows the lender to earn a higher interest.
Celsius Review – Regulatory Analysis
Celsius Legal Entity
The company “Celsius Network Limited,” registered in London, UK, is the operating company behind Celsius. It has a Money Service Provider license in the U.S. for all states.
Credit intermediary or Credit provider licenses
Lending fiat money against crypto collateral is a licensed activity in the European Union. The company will need either the credit intermediary license or the credit provider license. These licenses have to be registered (so-called “passporting“) in every EU country with the Celsius current users or prospective users. It looks like these licenses are not available at the moment.
Additionally, Celsius accepts fiat deposits and pays interest for these deposits. If all depositors would be qualified investors, then there would be no restrictions. However, retail investors are a *protected class” in the EU, and operating licenses are required.
Crypto custody licenses
EU defines with the AMLD5 the requirements to crypto custodians. EU member states have approved legislation, which fulfills the AMLD5 requirements. Some member states, for example, Germany go the extra mile – they require registration with the BaFin (German financial institutions regulator) if the company has German residents as their clients. These licenses are rather not visible at the moment.
Fiat deposit licenses
Retail clients can deposit fiat currencies into their accounts. Strictly speaking, Celsius will need a license for this.
Investment Fund licenses
If Celsius offers investment logic and asset pooling behind the scenes, then it’s an investment contract, a regulated activity that needs an investment fund license.
Why is it an investment fund – it’s because the assets are pooled together, and there is an investment contract between Celsius clients and Celsius company. Celsius actively manages retail investor funds by lending them out via the OTC and lending out the crypto collateral. Investment funds need to be registered if they accept retail investor funds. Additionally, the operating company will need an Investment Fund Operator License.
The licensing requirements are described in the following drawing:
- Some of these licenses need to be registered in every country
- The provider could register Investment Fund Operator license in one country
- In the case of the Investment Fund, which accepts retail assets, one will need a bank repository, which keeps the client assets (there are additional regulations on this too). This means it’s not enough to use BitGo services
- Credit provider license should be registered or “passport” in every country
- Crypto custody license might need registration in several European countries
- Fiat deposits license might not be required if the full regulated investment fund is behind the scenes. Otherwise, it’s required
Providing cross-border services
Providing credit is a regulated business, but doing marketing and onboarding the clients for the credit providers is regulated in most jurisdictions.
That’s the topic of cross-border banking services. Every jurisdiction has rules for:
- Can credit providers from other jurisdictions do marketing for their services? Usually, they cannot …
- Can credit providers from other jurisdictions onboard consumers for their services? Usually, they cannot …
- Can credit providers from other jurisdictions offer services to the consumers? Usually, they cannot …
It looks like these regulatory elements are not yet fully factored into the Celsius existing business model.
Difference between Celsius and SmartCredit.io
Here are the key differences:
- Celsius is a custodial solution, where SmartCredit.io is a non-custodial solution.
- Celsius offers fiat against crypto; SmartCredit.io does only for crypto-to-crypto borrowing and lending.
- Celsius offers crypto deposit accounts with interest, SmartCredit.io offers client-specific Private Fixed Income Funds.
What does it mean?: Private Fixed Income Funds is like having a wallet where you determine how and at which stage your assets will invest. After investing your assets in Smartcredit.io, all you have to do is sit back and watch the automatic processing of the asset whenever you want. In crypto deposit accounts with interest options, users have the chance to earn additional income via interest on the assets they obtain.
- Celsius offers a wide choice of classic blockchains as deposits/collateral; SmartCredit.io focuses on Ethereum based tokens.
What does it mean?: When you trade through Smartcredit.io, you ensure that the value of the loans you borrowed and lent will never decrease in your credit processes because the tokenizable system fixed to Ethereum protects your asset from such value fluctuations (Smart Token’s value is fixed to Ether).
- Celsius offers a rather high collateral ratio for the institutional borrowers, SmartCredit.io offers a rather low collateral ratio.
What does it mean?: Smartcredit.io enables more institutions or individuals to create loan offers and lend more freely.
- Celsius loans are not transferable (but lenders can cancel Celsius deposits ad hoc); SmartCredit.io loans are transferable.
What does it mean?: It is vital that tokens are presented to lenders when the credit is given, and these tokens can be transferred so that users do not have liquidity problems when they give loans and thus do not hesitate to use this new generation financial solution -remember that they may need to pay third parties during the term process. This kind of innovation in the world of credit ensures a faster flow of money and prevents the liquidity problem from creating an economic loop point.
- SmartCredit.io has as well the Fixed Income Fund functionality, which will invest based on the investment rules.
What does it mean?: You alone have complete control over your money. Users who want to earn income passively have the opportunity to manage their assets automatically within the framework of the rules they predetermine, thanks to the Fixed Income Fund.
Celsius Review Summary
Until now, we looked in this article on the Celsius crypto lending platform review. This platform offers good features for the custodial lenders / custodial depositors. However:
- It’s not fully clear at which terms are Celsius earning the revenues; it’s a little bit like a black box. More transparency would help to increase the trust of the users.
- It looks like the regulatory definition of Celsius is not fully completed from the licensing point of view.
Our view is that these are side effects of the custodial business model where borrowers are institutional clients. Our view is that the non-custodial model will simplify the regulatory structure significantly. This model proposes a system where almost every user can work as a traditional bank and earn money thanks to the loans they provide individually.
SmartCredit.io is fully non-custodial and has no access to the client’s funds. This results in much simplified regulatory requirements and much higher transparency to the platform users.
For more information, check out the related articles from the SmartCredit.io blog: