Celsius, a recently established cryptocurrency lending firm, has announced that it offers interest to thousands of users who deposit Bitcoin and Ether with its wallet application. Celsius claims to have won over 10,000 users since its mobile app was launched on June 29, with an average deposit of 0.5 BTC or 5.50 Ether earning as much as 6.7% per annum. Celsius generates the interest income by lending the crypto to hedge funds which open short position in the crypto market.
Celsius CEO Alex Mashinsky, said “When we make interest income we pay a chunk of that back to the people who gave us BTC.” Alex Mashinsky is well known for his work on Voice on Internet Protocol (VOIP), the technology that facilitates phone calls via cyberspace.
Celsius raised $50 million in an initial coin offering last year, selling a token called CEL. Since then, it has gathered crypto deposits worth several million dollars, with hundreds of new users signing up for the platform each week in September, the company said.
The interest – earning opportunities for Crypto users are rare and can be particularly welcomed in the current bear market as coin prices are boring. A rival company, compound, established last month, enabling people to invest Crypto in a short-term lending pool similar to the money market fund.
But often crypto and lending don’t mix well. For instance, BTCJam and BitLendingClub, two peer-to-peer lending platforms, both shut down in 2016, pointing to regulatory issues. Individuals funding on these platforms had little remedy when the borrower fails to repay, except online arbitration and, if not, court.
Moreover, the crypto price volatility can only increase the risk of lending money.
Regarding interest offering, Blockchain consultant Angus Champion de Crespigny said “To be able to consistently provide that return in assets that are so volatile is always going to be hard.”
However, Celsius requires collateral for all its credits and functions mainly as a bank than a P2P platform. The newly established firm counts academic cryptographer Scott Stornetta, who has been cited several times as an advisor in the original Bitcoin white paper, besides Telecom Veteran mashinsky. Beyond its present model, Celsius has a great forethought to put its actions on its own blockchain.
Business model similar to bank
In contrast to the new competitor Compound, which entirely loans crypto, for the most part Celsius loans are distributed in fiat, even though the firm requires crypto to be pawned as collateral for these. Celsius’ custodial crypto wallet, presented by means of an affiliation with the competent custodian BitGo, parallels a bank account in that clients get interest on their investments every Monday. Even under such scenario, Celsius wallet clients can pull out their deposits at any instance to a non-custodial wallet, or one where they manage the private keys. In this manner, the wallet looks like an interest-bearing checking account (however, it should be noted that there’s no federal deposit insurance here).
Similar to a bank, Celsius funds a portion of the money stored by crypto wallet clients. The borrowers, normally hedge funds looking to open short position, pledge dollars or any other cryptos as collateral in these dealings, and shell out interest in Bitcoin. Mashinksy said, slong with these crypto wallet deposits, “we have U.S. lenders who say ‘show us you have capital and then we will lend you dollars cheaply”.
So far, Celsius has issued a dozen fiat loans totaling approximately $11 million, with reimbursement periods extending from 30 days to three years. The startup is also closing a $10 million loan in XRP. The company has also recently negotiated an agreement to manage the United Nations Fifth Element Crypto deposits from funders around the world, assets the UN plans to deploy for numerous strategic partnerships.
Still, Celsius could ultimately face powerful rivals, like authentic banks. According to De Crespigny, there is no explanation why conventional financial firms could not offer a competitive crypto asset deposit facility. He said “they [banks] only evaluate risk and rewards, regulatory risks and volatility.” Celsius Coo Daniel Leon contended that the new firm could appeal to new clients from such institutions by reliably offering improved returns to investors and cheaper credits to borrowers.
“We believe if we pay them [users] a little more, if we charge them a bit less, then we’re going to win.” Celsius also follows KYC rules strictly, similar to banks.
Long-term vision
Taking everything into consideration, Celsius believes that auditable CEL blockchain, which it expects to launch by 2019, will make a big difference in the scenario. Leon said “We’re building our own blockchain that is going to provide total transparency on all our banking activities like no other service out there. That’s our commitment to do this on a distributed ledger rather than a private server.”
Before the launch of CEL blockchain, Celsius has started accepting Ethereum-based token as settlement regardless of whether the credit was made in a different currency, in order to ascertain the utility worth of the token.
Mashinsky said “It’s up to the user whether they repay in dollars or in CEL.”
After the launch, the public Cel blockchain would allow users to audit every operation carried out across the platform without disclosing the identity of borrowers or depositors, says the company. Mashinsky said Celsius will use this blockchain to account for the distribution of all profits after operating costs to users.
That vision convinced satoshi-cited cryptographer Stornetta to join Celsius as a consultant. He was generally avoiding crypto startup involvement until now. Stornetta told “I made an exception, the first exception, for Celsius because I think their success is going to be a win for the entire blockchain community.”
Explaining how Celsius offers services comparable to traditional banking, Stornetta said “You have to take your idealism and couple it with the nuts and bolts of building a compelling, end-user value proposition.”
