September 7, 2022

The biggest crypto news and ideas of the day

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Hello, and welcome to The Node. I'm Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today's newsletter: staked ether on Lido trades at widest discount since June, Vermont regs investigate Celsius and a user fighters to get his funds back from Voyager.

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– D.K.

Today's must-reads

Top Shelf

Staked Ether Price Discount Widens to Most Since June Ahead of Ethereum Merge: The discount between the price of liquid-staking protocol Lido's staked ether (stETH) and the price of ether (ETH) widened to 4.5% (or 0.954 ETH), the most since late June, according to data from Dune Analytics, as users continue to trade ahead of the Merge.

Meanwhile, bitcoin dipped below $19,000, hitting its lowest point in two months.

Vermont Regulator Investigates Celsius, Says It Resembled Ponzi Scheme at Times: Crypto lender Celsius Network misled investors about its financial health, using its CEL token to bolster its balance sheet and at times using new investor funds to repay old investors, the Vermont Department of Financial Regulation alleged in a new filing Wednesday.

The latest state to investigate Celsius is the most damning as regulators fall just shy of calling the protocol a Ponzi scheme.
Separately, a crypto trader is trying to recover funds from bankrupt crypto firm Voyager after finding that the platform was still taking in deposits even after freezing withdrawals.

Binance Introduces Ether Staking in U.S. as It Steps Up Competition With Rivals: The world's largest cryptocurrency exchange's U.S. unit started offering a 6% annual percentage yield on staked ETH. The timing of the move, coming days ahead of the Merge, suggests Binance.US sees ether staking as a major staking battleground in the months ahead.

Digital Euro Will Focus on Personal Use, Not Web3: European Union officials said a digital euro will only enable payments initiated by people, rather than allowing businesses to settle invoices, issue paychecks or be used in decentralized finance in its first stage. The bloc has not yet taken a decision on issuing a central bank digital currency (CBDC), or even whether it would use Bitcoin-style blockchain technology.

The central bank digital currency could fail if it doesn't offer something more than what cash and credit cards do, industry representatives remarked.

Crypto Exchange KuCoin Highlighted Flaws in DeFi Platform Acala's Post-Exploit Proposal: KuCoin, the Seychelles-based crypto exchange, has highlighted flaws in decentralized finance (DeFi) network Acala's community proposal to recover billions of dollars worth of aUSD erroneously issued during a mid-August exploit. It has pinpointed several mistakes in the platform's data on erroneously issued stablecoins.

The community is still working to track and recover the remainder of the hacker-created tokens before resuming services, which remain suspended across the network.

– Xinyi Luo

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Putting the news into perspective

The Takeaway

Celsius Lied. Portfolios Died.

A bombshell new filing by the Vermont Department of Financial Regulation in the Chapter 11 proceedings of the collapsed Celsius Network makes the case that the crypto lender was effectively insolvent, not just after the crypto market declines of early 2022 but as early as 2019.

Celsius itself admitted to investigators "that the company had never earned enough revenue to support the yields being paid to investors." The filing further claims that its financial analysis "suggests that at least at some points in time, yields to existing [Celsius] investors were probably being paid with the assets of new investors."

Although the regulator never used the word, that's the dictionary definition of a Ponzi scheme.

In short, contrary to voluminous public statements by CEO Alex Mashinsky, Celsius never really functioned as an investment middleman for crypto-asset holders, generating yields from institutional lending and passing them along to depositors. Instead, nearly from the beginning of its existence, it was paying depositors at least in part from non-revenue sources including other depositors' funds, venture capital investments or the CEL token it printed from thin air.

I recently wrote about the inherent danger of unsustainable high yields as a customer acquisition strategy in finance. That encompasses other actors, including both BlockFi and the Terra system. But Mashinsky and the Celsius team are in potentially much, much hotter water than even a delusional screwup like Terra founder Do Kwon. There's a slim chance Kwon actually believed his absurd claims about the UST "stablecoin." That's why I called him the Elizabeth Holmes of crypto – like Holmes, it remains at least slightly unclear whether Kwon was an outright fraudster or just not very bright.

(Silver Screen Collection/Hulton Archive/Getty Images)

Alex Mashinsky won't get to exploit the same ambiguity. The Vermont filing, as the kids put it, has got receipts.

It again and again notes specific dates on which Mashinsky made public attestations to the firm's financial health, at the precise moment Celsius was actually deeply in the red. Those deceptions may well form the foundation of a criminal fraud case against the CEO and his allies.

The Vermont filing also explores the role of the CEL token in Celsius' finances. "If Celsius' net position in CEL is excluded, its liabilities exceed its assets in all of the Freeze Reports and Preliminary Balance Sheets provided to state regulators," the filing claims, referencing reports beginning May 2021. Even more broadly, the filing claims that "excluding the Company's net position in CEL, liabilities would have exceeded its assets since at least Feb. 28, 2019."

In other words, Celsius was effectively insolvent nearly from birth. The only way it avoided acknowledging that was by tallying the value of its self-generated "Monopoly" money.

And if that wasn't enough, the Vermont filing further cites "credible claims [that] Celsius and its management engaged in the improper manipulation of the price of the CEL token." It claims that Celsius spent hundreds of millions of dollars worth of depositor funds buying CEL tokens, with the possible intent of pumping the token price – including after Celsius halted user withdrawals on June 12.

Regardless of what any court concludes, that sure sounds like criminal behavior. It's also a major question for regulators going forward – should centralized private companies be free to issue their own blockchain tokens at all? And if they can, how should they be required or allowed to account for those tokens financially?

Celsius, certainly, makes the case that printing your own money shouldn't be treated as a legitimate path to corporate profit.

– David Z. Morris

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Overheard on CoinDesk TV...

Sound Bites

"There's a lot riding on this."

– "The Cryptopians" author Laura Shin, dicussing the upcoming Ethereum Merge, on CoinDesk TV's "First Mover"

Off-Chain Signals

What others are writing

7 Critical Events in the Celsius Bankruptcy Case (Blockworks)
The future of crypto is at stake in Ethereum's switch (The Economist)
They built a Minecraft crypto empire. Then it all came crashing down (rest of world)
Cryptoverse: Bitcoin's no longer the king of the swingers (Reuters)

Which institutes are most impacting the blockchain world? Tell us your thoughts in a five-minute survey. We're welcoming responses until Sept. 7. Take the survey here.

Web3 M&A Is Coming of Age With the Help of the Industry's Best

M&A deals: Alpha that too many overlook

Mergers and acquisitions (M&A) doesn't always get the love it deserves, but it should. Across the economy, M&A delivers huge value to everyone when it's done right. For strategically smart entrepreneurs and founders, it opens the door to sector-disrupting synergies of talents, intellectual property (IP) and revenue streams. For investors, it can be a stunning source of alpha and return on investment (ROI).

A recent report published by Bain earlier this year makes all this clear, highlighting that since 2014 the value of M&A deals worldwide has amounted to an absolute minimum of $3.6 trillion each year. In 2021, the total value of M&A deals hit $5.9 trillion, a record-breaking figure.

Continue reading here

*This is sponsored content from Acquire.Fi.

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