Transparency and banking are two words not usually complimenting each other in any positive context. Never has there been mainstream news shining the light on major bank practices of inviting the public to view their books on a continual basis. Yet at the same time, we hear (and many may believe or at least are apathetic to) their messages, day in day out offering the “lowest rates” for loans or “best returns” on deposits. Explanations of the macro view in the banking sector are forever shrouded in ambiguous technical jargon in combination with the narrative they are “doing everything possible” to provide the best conditions to the consumer.
There’s obviously a major gap between what is said and done.
The gap between what banks say and do
So when we hear of a new player in town creating an alternate banking market and making similar statements, it’s only natural to be sceptical. Celsius Network - offering customers the ability to earn reasonable interest on bitcoin, gold and other cryptocurrencies; get cash loans using crypto as collateral, as well as allowing users to transact peer to peer with crypto payments, may conjure up the same initial reaction - perhaps even more with “bitcoin” and “crypto” associated with “scam” often touted in mainstream media.
So how is this any different?
Transparency is the key to trust
The more complex an explanation then the more hidden the message, if there is a genuine one at all. Celsius ambitiously aims to increase their 140k user base, established over the last 2 years (the majority in the last few months) a 100-fold. They aim to achieve this through transparency to the community. This is at two levels:
- Level 1: Transparency of their core business model – in other words, how they say they will make money;
- Level 2: Transparency of their figures – real-time metrics to prove their business model is sustainable.
Clear message so far, right? Let’s look into the detail and (hopefully) assist potential users in deciding whether to take the next step with Celsius, or at least arm them with some comprehensive information.
Regulations and Compliance – Celsius is doing what is needed
Before we look at Transparency Level 1, a point on compliance. The 2017 initial coin offering bubble saw many exit scams and failures of companies for conducting activities without being registered by the Securities and Exchange Commission (SEC). In stark contrast, Alex Mashinsky, CEO of Celsius, took the strategic decision from the onset to be compliant with local regulations. This included proactively filing with regulatory bodies like FinCEN and the SEC. Celsius continues to reiterate the message they only offer services in jurisdictions with explicit approval.
Transparency Level 1: A Fully Backed System
So what do I mean by “fully backed”? Simply, the Celsius core business model is one where there are enough reserves available against the dollars (or assets) listed in a user’s account - for example dollars that can be used in a loan or savings account. Should be a no-brainer, right? Well, the Cyprus 2013 bail-in was a sobering example of account holder’s funds clipped significantly for the very reason they were not fully backed. Why is this? Because traditional banks leverage depositor’s funds at a rate of 10 times or even much more. For instance, for every dollar deposited, the banks lend over $10. So, if the banks don’t hold enough in reserve and if borrowers are unable to pay back loans, users will be unable to withdraw their funds because they probably don’t exist. Precarious right?
Celsius is at the opposite end of the scale ensuring they are always holding substantial reserves including assets greater in value compared to those that are lent out. Depositor’s crypto assets are pooled and lent out to professional customers such as hedge funds, exchanges and institutional traders who put up collateral exceeding the value of the loan in crypto they wish to take. In fact, the loans which are usually over a 2-week period are collateralised up to 150%. In other words, it’s a fully backed system.
Celsius also does not charge any fees. No account fees, whether monthly or annually as is the case with the majority of banks. And no withdrawal fees – a common theme practically across all crypto exchanges.
Celsius Network Corporate Video
So the above sounds great but to use a well known bitcoin adage “don’t trust, verify”, how can one find if Celsius walks the walk?
Transparency Level 2: Reading the Celsius Metrics
So where can we find these transparent metrics? Easy, much of the necessary information is just a click away - in the Celsius mobile app. Once a user creates an account (with an email address and password) – which is before having to go through the identification (Know Your Client) process – they can simply click on the “community” button. This will bring them to the Celsius Community Page.
Accessing Celsius Community Metrics
Users, Assets Under Management, Cash & Collateral
There are several key metrics all clearly labeled on this page. Some are real-time such as the number of members and others are released monthly for instance assets under management. The simple trend analysis here is - are the numbers going up? Is Celsius gaining more users and assets under their management? If so, then that provides one level of confidence in that the company is growing which aligns with holding on to more collateral and cash in the provisioning of loans and institutional investments to generate yield.
Celsius users, assets under management, collateral and cash
Ok, sounds like a good thing – but Ponzi schemes exhibit similar outward characteristics of growth, right?
Most Deposited Coin
Bitcoin as the most deposited coin is another positive indicator. The original and greatest cryptocoin with its unique characteristics in comparison to the thousands of altcoins demonstrates the fundamentals of Celsius Network are built on a solid foundation. Limited in supply, open, public and censorship resistant, bitcoin cannot be inflated or lent to more than one entity – unlike fractional reserve banking which is causing systemic problems within the traditional financial system.
Most Deposited Coin
Still don’t believe the figures? Go to Celsians.com under “statistics” and they actually verify the deposits on the blockchain.
Deposits and Withdrawals
The most basic function expected of a bank is to effectively and securely manage deposits and withdrawals. And in doing so ensure your funds are available for withdrawal upon your request. Therefore, wouldn’t it be handy to see these figures? That’s exactly what Celsius provides.
Deposits and Withdrawals
Further, I am sure alarm bells would ring if the ratio between deposits and withdrawals approached or dipped below 1. That is, if you knew there was more value being withdrawn than deposited, would you keep your money in that bank? Looking at the current ratio which is just under 2:1 and tracking this figure over time can provide additional confidence Celsius is heading in the right direction and that they actually have the funds available for lending. Further, Alex raises an important point on ensuring Celsius always has 20% of “idle coins” available at all times for withdrawals. I know what you may be thinking, what if everyone withdraws their coins at the same time? Yes, that would cause delays, however as mentioned earlier, with assets lent to professional customers collateralised at 150%, along with incentives for depositors to hold their money in Celsius to earn interest, then it becomes increasingly clear deposits are covered. Again, if you don’t believe the deposit/withdrawal numbers, Celsians.com have it tracked and verified. Sounding like a broken record now I know, but which bank does this?
Next is the crux of banking – interest. Which, mind you is becoming increasingly irrelevant for the average saver today experiencing close to zero, or worst still negative interest rates. Celsius displays Total Interest Earned in 12 Months as well as average interest earned across the whole population of Celsius users.
Total Interest Earned in 12 Months and average interest earned
Interest is Annual Percentage Yield (APY), paid every Monday, either in the crypto currency the user deposited such at Bitcoin, Litecoin, Ethereum and many more, including a number of stable coins – or in the Celsius token, “Cel” (more on this later). For example, depositing in the USDC stablecoin will generate interest paid in USDC and therefore exchangeable 1 for 1 against traditional US dollars. So in fact, there is next to no risk with crypto volatility in this scenario.
Interest rates for the most popular cryptocurrencies at the time of writing this article are around 4-5%, with stablecoin such as USDC earning over 8% - a magnitude of order greater than most traditional banking standard savings rates. Just like the earlier metrics, seeing these figures increase over time is another positive indicator. Celsians.com offer an additional level of granularity in that they tweet the actual payouts of their most popular cryptocurrencies every week.
Celsian’s weekly interest payments tweet
Keeping tabs on the interest metric is ultimately an extremely easy litmus test in determining if Celsius is paying more to the community hence allowing your savings to grow.
What about metrics for Celsius institutional lending?
Granted, we do not see the details behind how Celsius is lending out user’s assets to generate revenue. That said, they do disclose the average rate of 9% charged to hedge funds, exchanges, and institutional traders for borrowing. Remember, combining this with a collateralisation of 150% provided by the borrowing institutions and on the other side of the equation, consumers putting up a 4:1 ratio of their crypto against USD borrowed (in order to enjoy the lowest borrowing rates), then the sustainability of this model becomes abundantly clear.
Further, Alex and the team placed the cherry on top of the transparency cake when they explicitly stated on their recent AMA on 24 July, they are working on additional features allowing users “to verify that you are earning the correct amount... verify that Celsius actually earned this interest and see how much everyone else earned that week”. Which traditional banks are working on this? None. In fact, according to a Forbes article in 2018 cited on the Celsius website, traditional banks make between 14-25% on their capital investments – so clearly they are simply deciding not to pass on any significant proportion of profits to their depositors as interest, or their borrowers in the form of very low interest rates (as low as 1%).
Finally, the Celsius token Cel, launched in March 2018, offers additional incentive to users to earn more interest - up to a third more than the going rates if they chose to be paid in this crypto and are holding the required proportion of Cel in their account. There is also the added speculation the token itself will be worth more in the future. I will leave this to the reader to do their own research in terms of considering it, however interestingly Cel has quickly become the leading crypto in which interest has been paid out.
Incentives to be paid in Cel
Again, in the interest of transparency Celsius have comprehensive information on the details of the Cel token and the role it plays in their business model. In terms of Cel supply – it is limited and Celsius clearly list the largest wallets holding cell, and display if those wallets are locked (ie not in circulation), under management (eg as part of the Celsius treasury) or circulating. Celsius also publish a Top 200 Cel holder list.
Cel Top 200 Holders and largest wallets holding Cel. (The list was increased from top 100 to 200 after we wrote this article, hence the screenshot with top 100 instead).
Monitoring this information may provide some insight as to the direction the Cel token is heading in. For instance, if the value for the holder at position 100 is increasing, then it’s more likely more users are accumulating, which creates more buy pressure and can shift prices up.
The Celsius Flywheel – a concise summary of their business model
So in a nutshell, by lending out crypto to institutional investors as explained above, Celsius collects interest and distributes a significant portion (up to 80%) to its users in the form of interest on deposits. They also purchase Cel tokens from various exchanges when necessary to distribute to members who want to be paid in that crypto. In both cases, user account balances increase. With increasing assets under management, Celsius is able to provide low interest retail loans to consumers (1% based on 4:1 collateral being provided), demonstrating they are putting the community first. This process is summarised by the Celsius Flywheel.
The Celsius Flywheel
In stark contrast, traditional banks apply a minimal percentage of their return on capital for consumers, resulting in much higher rates on retail loans when compared to savings returns. The table below demonstrates how banks will struggle to compete with Celsius.
Celsius vs Traditional Banks
Sounds like the time is long overdue for these practices to cease - and Celsius is clearly on a mission to end them.
Undeniably, one must still place a considerable level of trust in Celsius. Specifically, in:
- Alex Mashinsky, CEO
> to continue to take the organisation down the right path,
> to continue to meet necessary regulations and,
> to protect the Celsius model from being compromised by any draconian regulatory requirements
- the business model and a number of the metrics presented (until the additional features are in place to verify them independently)
- the system security and organisation culture
> as custodians of user’s funds
> avoiding/limiting impact of bugs
> avoid bad players within the organisation
If the reader believes the above is too risky that is their right to make that call. After all, as bitcoin expert Andreas Antonopoulos has pointed out many times, citizens of Western nations largely have access to a system that works in terms of financial services - so there may not be incentive to change. However, in my opinion, I think the risks associated with the above are very small, especially when one looks behind the curtain hiding the fact the fiat system is both decaying and heavily skewed to a small elite minority who are closest to the big banks.
With that said, on the spectrum of completely decentralised and private, to completely centralised KYC and permissioned banking solutions, Celsius may well and truly be a big disrupter in the Western traditional banking space. Holding your own private keys to your crypto may not necessarily appeal to a wide audience - rather a much smaller and more principled one. Therefore, the masses may take advantage of real opportunities to protect and grow their savings through the disruption of the traditional banking sector.
Transparency is at the heart of the Celsius culture. They demonstrate this on a daily basis inviting any who wish, to view their sustainable business model as well as access supporting metrics which are just a click away. This level of transparency is frankly incontestable by the banks. For these fundamental reasons, I believe Celsius offers a safe bet for those looking for a trustworthy alternative to traditional banking and earning a fair return.
If you enjoyed this article, feedback is very welcome below. Also, if you wish to try Celsius, please use my referral code 128197a889 when signing up (or click the download link) and earn $20 in BTC with your first deposit of $200 or more! #UnbankYourself
And if you would like to help make sure I publish more articles, please consider a small donation below:
By Douglas Johnson on 2020-08-26 08:31:53 ET
Excellent in-depth article, Haso. You did it again! Well done. You are truly a talented writer. 0
By Gruic on 2020-08-29 06:35:32 ET
Excellent work for a great article, very exhaustive. 0