- Challenging the Status Queue with Blockchain: Investment Bank Edition
- Celsius: Blockchain Verified Interest and Cryptocurrency Interest Accounts
- Leading the Crypto Interest Account Marketย
- 2020, Growth, and Onwards
- Celsius, Opportunities, and Onward
Celsius was considered a top cryptocurrency interest account before suspending all customer withdrawals and filing for bankruptcy, owing its users $4.7 billion. Mashinsky stepped down from his role as CEO in late September. Prior to freezing withdrawals, Mashinsky withdrew $10M in tokens along with his wife Kristine Mashinsky and former chief strategy officer Daniel Leon withdrawing over $2m and roughly $7m, respectively.ย Mashinsky was arrested and charged with seven counts of fraudย by the US Department of Justice in July 2023.ย
This interview was conducted and published in May 2020. Celsius would grow to 300,000 active users (over $100 in wallets) and more than 1.7 million registered users, prior to shutting down in 2022.
โCelsius is going after all the money in the world,โ says Alex Mashinsky, the Founder of Celsius, who plans to make more than just a dent.
Investment banks are thriving despite bustling fintech startup activity and looming economic threatsโJP Morgan celebrated its most profitable year ever in 2019 with a record $36.4 billion in net income, a bulk of which came from a very important strategy called Security (Sec) Lendingโ weโll get into that soon enough.
Alex has made around 120 VC investments, holds 34 patents, raised over a billion dollars, and has achieved over $3 billion in exits.ย Alex is on his eighth startup company as a founder, and two of his companies, Arbinet and Transit Wireless are two of New Yorkโs biggest venture-backed exits ever, with exits of $750M and $1.2B respectively.ย The core similarity between these exits is that the companies built a monopolistic hold in their industries and utilized groundbreaking technology to pioneer business models assumed to be impossible.ย
At face value, the concept is easy to understand: Users deposit any amount of a variety of digital assets and earn an annual interest rate upwards of 11%โ a stark comparison to traditional bank savings accounts, which offer anywhere between .01% to 2%.ย
โWhat most people are missing is what the banks are telling their investors how they earn 15-18% on their depositorsโ money every quarter,โ Alex starts. โIf they cared about their customers, the banks could also be paying 9% as we do. Theyโre focused on returning profits to shareholders, not interest to depositors, the two directly conflict.ย CoinCentralโs Steven Buchko first interviewed Alex back in 2018, when Celsius was in the middle of launching its app
Challenging the Status Queue with Blockchain: Investment Bank Edition
Rarely does one visit appealing financial opportunities without a healthy dose of incredulity or skepticism. The expression If itโs too good to be true, it probably isโฆ is built on multi-generation experiences of disappointments, trickery, and usually a guy with a bleached smile, an expensive suit, and a $100 haircut.
However, too good to be true may carry less weight in a paradigm that is already significantly skewed against your best interests. At least, thatโs what the Celsius ethos argues.ย
โBack when I made VoIP in the โ90s, we were able to offer the service for a fifth of the price,โ says Mashinsky. โPeople said it was impossible to offer cheaper services than AT&T. Today, people assume that just because a bank pays them 1% in interest, no one can beat the bank.โย
โBut, Mr. Mashinsky, how does the bank even pay people 1%?โ a curious reader may ask.
When we think of big banks, we usually think of gigantic buildings sitting on the most expensive streets of downtown and highly paid executives. Banks just know how to make money, even in their darker days. In the 2008 aftermath, $1.6 billion of the federal bank bailout money went to executives. Lloyd Blankfein, the then-president and chief executive officer of Goldman Sachs, left with $54 million in compensation that year, and the top five executives received $242 million. The house never loses.ย ย
To understand how banks make their money, Mashinsky implores us to study up on something few Americans outside of the finance world are aware of called securities lending.ย
Securities lending, or sec lending, is the practice of โloaningโ a stock, security, or derivative to an investor or firm. Itโs generally done between brokers and dealers and not individual investors. As a critical component of creating market liquidity (specifically for re-hypothecation, or basically the process to facilitate shorts and other options trading), sec lending can be incredibly lucrative.ย
Mashinsky walks us through a simple example.
โLetโs say you buy a TSLA stock from Charles Schwab. You take on the risk of TSLA going up or down, but on the back-end, Charles Schwab is loaning your TSLA to other brokers and dealers and making something between 12% to 17% per year.โย
How much do you, the investor, and owner of TSLA make on Schwabโs interest revenue? A big fat zero.ย
Similarly, most bank savings accounts have historically offered depositors a sliver of a percentage (now upwards of 2%) on their assets, but are loaning depositor out to receive hearty returns. JP Morgan, a financial behemoth entrenched in American history, banks for over 100 million Americans who have Chase cards, bank accounts, and other accounts.ย ย
โJP Morganโs cost of capital is less than 1%,โ says Mashinsky. โTheir return is close to 17%. Thatโs how they make $36B a year, which they mostly use to buy back their stocks, pay dividends to shareholders, and compensate executives. How is that a good deal for the depositor? What does the depositor get out of this? They take the money you give them for free and lend it back to you and charge you 24% on your credit card.โย
Mashinsky brings us to the punchline, of which he has many.ย
โIf a bank has 10:1 leverage on your money, if you withdraw your money, they lose 10x. The only one who has the power to let the bank do what it does is you. You just donโt know you donโt have the power.โ
Celsius is looking to flip the script.
โShow me a fintech company that puts a scratch on any bank,โ says Mashinsky. โJP Morgan just had their best year. No fintech company has been able to unseat or dethrone these institutions. They just get stronger and institute it. Institutions canโt win in my game. We took the juiciest part of Wall Street and brought it to the crypto community. People hate me for spilling the beans. Give the bulk of the fees to the depositors. We give 80% of revenue to the depositors.โย
Celsius: Blockchain Verified Interest and Cryptocurrency Interest Accounts
Historically, monopolies build a fortress around their business interests by the high barriers to entry created by existing infrastructure theyโve built or purchased.ย However, advances in technology can often antiquate the existing infrastructure, as weโve seen the impact of automobiles and planes on the railroad industry.
Mashinsky wants to use blockchain as the impetus to topple Wall Streetโs dominance and bring financial empowerment to the people.ย
โLetโs start with the bank,โ leads Mashinsky. โImagine a public audit function. You make a deposit in a bank and ask where your money is going, where itโs stored, who theyโre lending it to, how much the bank is charging them, how much of that money is coming back to you, and how they plan on distributing it back to you.โย
โIf youโre not a high net worth individual, any bank would kick you out and shut down your account for having the audacity to ask these questions,โ Mashinsky half-jokes. โThey assume the marble pillars outside every bank speak for themselves: they know how to make money. They donโt have to prove anything.โ
โNot only that, but the accumulating re-flating activities the government is doing is also going to get us in trouble. We have over $100T in deficits and $120T in liabilities. If banks fail and get bought out or bailed out, itโs only prolonging it. You can rearrange the seats in the titanic at any time, but the ship is still sinking. This ship is going down no matter what, the question is how much water is it taking on.โย
Celsius cuts out banks and governments by using blockchain to give all parties visibility into its business workings. It had to start with re-inventing the interest-bearing account from scratch.
โThe reason Celsius focuses on transparency and using the ledger is its amazing mechanism to deliver the interest. I canโt use a credit card to deliver the fees to you because their fees are too high. Bitfnix recently moved almost $1B for $6 using blockchain. Thatโs not possible with any other infrastructureโ
โWe use blockchain as an interest-delivering vehicle on the front-end, and weโre using transparency and open ledgers on the back end. Celsians.com, for example, is a third-party site that uses blockchain data to audit Celsius. They take all of the wallets we publish since transactions are public, you can verify everything weโre saying. Who theyโre giving these loans to? Payments coming in. We can see the interest, whoโs paying the interest, and who is Celsius paying this interest to. We publish all wallets on the website, you donโt have to be a member of Celsius, you can verify it just by knowing the blockchain works.โ
Mashinsky sees Celsius as the future of the financial institutions, even if only as a foundation.ย
โWe hope we set the skeleton of the foundation of the future institution. This isnโt about Celsius, itโs about creating a whole new infrastructure to replace Wall Street.โ
โCelsius has shared how much we charge customers, how much we earn, how much we payout for the past 114 weeks since our launch,โ Mashinsky says proudly. โ We are probably the most transparent company in cryptocurrency. Our community routinely runs audits on our numbers via the blockchain as well.โ
Leading the Crypto Interest Account Marketย
With more earnings in BTC and ETH than all of its competition within the cryptocurrency space combined, Celsius has earned a significant stride.ย
Mashinsky credits Celsiusโs market leadership with community effort and operational execution. Mashinsky, who served in the Israeli military for three years, isnโt one to shy away from going for the jugular.ย
โCelsius did more than anyone else because our competitors just donโt pay users enough. Celsius distributes 80% of its revenues to its community, whereas our competitors just published 30% of NET profits which is much less.โ
โNone of these companies will show you how they earn the interest or share any details about their business,โ says Mashinsky. โMany of them wonโt even give you a physical address of where their offices are. I would not trust such companies.โย
โMany of them are simply just trying to compete with us directly. They arenโt earning the rate, theyโre subsidizing payouts with VC money they raised from Wall-street type guys,โ Mashinsky points to competitors BlockFi and Cred. Celsius is a community effort looking to provide as much effort to the community as possible.โย
If youโre planning to beat Celsius, Mashinsky claims, youโd better be prepared to cut your profit margins.
โIf you want to offer higher rates than Celsius, youโd better give more than 80% of what you make to the community. We want to set the bar really high.โ
2020, Growth, and Onwards
The interest-bearing cryptocurrency account niche is a comparative gnat when standing next to the traditional interest-bearing market. To Mashinsky, this only means room for growth.ย
โCelsius is going after all the money in the world. 7.5B people want to earn more interest, yet banks and governments keep lowering rates and are giving all the money to the corporations and to the โtoo big to failโ banks,โ Mashinsky says, preparing a heated tangent to the current economic situation.ย
โAll the money weโre printing now should be going to the infrastructure of this country,โ Mashinsky begins. โGetting everything done locally requires tens of trillions of dollars. Instead of spending it on infrastructure, weโre giving it to airlines, hotels, and cruise companies. Weโre Reflating everybody, zombie companies, the fed will bail out anybody, exactly what japan did for the last 30 years. Thatโs what my beef is. Taking precious dollars from the futureโ borrowing it from our kids, making them pay taxes on it in the future, and spending it to maintain our lifestyles today.โ
โIf you deliver reliable interest income, seven billion people will want to use your service,โ Mashinsky writes. โThat has been our plan from the beginningโ delivering interest income to as many people as possible, and in the process, creating mass adoption for all the coins we support.โ
One of the tokens Celsius will inevitably bring attention to is its own. CEL can be used to effectively increase interest rates on savings accounts and decrease interest rates on loans.ย
โCELโs main function is to offer up to 30% more interest and provide 5% income if you HODL it,โ but we have other utilities.โ
However,ย cryptocurrency deposits arenโt FDIC insured, a bane in the user acquisition aspect for many cryptocurrency interest-bearing companies. How does a company like Celsius mitigate the risk of users losing their assets in a doomsday or hack scenario?
โWe only lend coins against collateral, so all loans are asset-backed,โ says Mashinsky. โMost banks are leveraged 10x via fractional reserves and lend to consumers with no collateral via credit cards, so I think we are actually safer than most banks. We had zero defaults since launch, while all major banks just took over $30B in loss reserves just in the past 60 days.โ
Celsius, Opportunities, and Onward
Mashinsky brings decades of experience as an entrepreneur into cryptocurrency, a vertical heโs been following since 2013. Opportunity, according to Mashinsky, requires using blockchain for innovative business models, not just traditional replicas on a blockchain.ย
โThe best opportunity is for startups to invent a new business model that can only be done on the blockchain as Celsius did with interest income in crypto interest accounts. Many companies in crypto just copy Wall Street business models and call themselves revolutionary. I invented VOIP in 1994, and we are now building MOIP (Money over IP) to deliver a new decentralized blockchain-based financial system to the masses.โ
Mashinsky also points to the entrepreneursโ responsibility to help cryptocurrency become commonplace.
โWeโve been waiting for years for mass adoption. While any Bitcoin trader will say that BTC has done well compared to other asset classes, it gets maybe a C- grade for inclusion, scale, adoption. There are maybe 30-35 million active unique wallets worldwide for all the coins. From an adoption standpoint, weโre very early days. Celsius partially came about by asking myself how we can get to mass adoption.โย
โWe have almost 100,000 users who did KYC: thatโs a huge number for cryptocurrency but still a small number for fintech. I think it is hard for people to believe we can pay 9% on something based on USD (stablecoins) when the bank tells them they can not even pay them 1%.โ
Mashinsky advises people to get educated but to be wary.ย
โTrust, but verify,โ Mashinsky says of blockchain echoing Reaganโs approach towards the Russians in the Cold War. His approach to news is similar. Where does an entrepreneur like Mashinsky get his day-to-day information?ย
โI watch a lot of news via YouTube and read WSJ and other financial news sources. Also, specific pubs like CoinCentral :),โ Mashinsky notes flatteringly.ย
In closing, Mashinsky pushes people to take action to change things themselves by taking action.ย
โIf you donโt like the game, invent a new one. The choice is on most of us.โ
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