The proliferation of cryptocurrency banks accepting deposits and making loans worries stock market policemen here and in the United States, but that does not seem to frighten the Caisse de dépôt et placement du Québec (CDPQ).
Celsius Network was the choice of the woolen socks of Quebecers, who have just participated in a round of financing of 400 million US to support this company which escapes the eyes of the regulatory authorities. Should we be worried? Should depositors beware of these new kind of banks? Your turn to judge.
How does it work?
Celsius Network, BlockFi and other platforms are inspired by the model of traditional banks. They pool deposits of cryptocurrencies, such as bitcoin, offer loans and pay interest – often over 10% – to depositors.
How can these players offer such returns on deposits when the rates offered by financial institutions are starving? There are a few leads.
“They lend cryptocurrency to [fonds spéculatifs et des firmes de capitaux privés] who need these assets for hedging or other transactions, explains Louis Roy, president of Catallaxy, a branch of Raymond Chabot Grant Thornton, which specializes in blockchain. They are prepared to pay a premium. ”
Unlike traditional banks, these new players are not subject to a minimum threshold of capital to be maintained in their reserves. So they have more money available.
As a depositor, is my money guaranteed?
No.
In Quebec and Canada, the Autorité des marchés financiers (AMF) and the Canada Deposit Insurance Corporation protect deposits made with various registered financial institutions.
Coverage can be up to $ 100,000 per category of deposits.
“Indeed, these deposits [auprès des cryptobanques] are not protected, because they are not money deposits, ”explains AMF spokesperson Sylvain Théberge.
What happens if everyone claims their money at the same time?
“We do not have the answer,” recognizes Mr. Roy, when asked the question.
Traditional banks need to maintain capital reserves to enable their customers to withdraw funds. This does not yet apply to players like Celsius – which says it has over a million customers and total assets of US $ 25 billion.
London-based Celsius, which is said to be valued at some US $ 3 billion, did not respond to questions sent by Press about its ability to respond to massive withdrawals.
“If you are promised such high interest rates, it is necessarily that there is a setback versus traditional bank loans,” notes Martin Lalonde, portfolio manager at Rivemont, a firm that offers a mutual fund. based on bitcoin.
What are the other risks?
Centralized virtual currency interest and lending platforms are not immune to cyber attacks. Thus, the blockchain – a decentralized transaction ledger – does not offer protection against “hypothetical malicious access” to wallets, says Lalonde.
“The risks are important, adds the president of Catallaxy. If I want to do business with a platform, I have to make sure that the assets will be deposited in a recognized asset custodian, like Gemini and BitGo. A handling error and everything can go away. ”
It is also useful to be aware of the warnings issued by these companies often presented as the banks of the future.
BlockFi and its partners could be targeted by “cyber attacks, extreme market conditions or other technical difficulties,” the company warns on its website. Such events could cause the “temporary or permanent” stoppage of withdrawals and transfers.
In the case of Celsius, Fireblocks, which acts as a “custodian” responsible for protecting against cryptocurrency theft, offers insurance on the assets held in the wallets, Lalonde notes.
For each platform, the terms of use have many exceptions. Better read them carefully. In addition, it is impossible to be sure that we are doing the maximum in deposit protection.
“A financial institution is audited,” says Mr. Roy. In the other case, we do not always have 100% certainty that it is done. ”
Will these platforms be regulated?
It will take time, believe Mr. Roy and Lalonde, who believe that progress will be made in stages since this new model is here for good. It is therefore to be expected that these cryptobanks will remain in the sights of stock market policemen.
In the United States, the State of New York has just followed suit with New Jersey, Texas and Kentucky, in particular by requiring that certain players provide explanations on their business model.
For certain products, Celsius offers in particular to remunerate its depositors with its own virtual currency. For some gendarmes, this is an offer of unregistered titles.
“It is true that this raises a lot of questions,” says the president of Catallaxy. Is it a currency, a financial instrument, a commodity? Serious actors want to adjust. But they will continue to get slapped on the fingers. “
What was raised south of the border worries the AMF, which says “analyze the situation”. The Authority is examining in particular the case of Celsius. By its “digital nature”, Quebec investors were probably able to do business with the company, even if it is established outside the country.
When announcing its investment in Celsius, the CDPQ recognized the “regulatory issues”. The institution argued that the arrival of institutional players in the governance of these new type of banks should allow faster progress in terms of governance.
“It will take two to dance,” says Lalonde. The best we can hope for is a concerted effort not to slow down this technological development, without compromising investor protection. ”
In the United States, where cryptobanks are multiplying, regulatory authorities are therefore in a sprint to try to supervise this sector where speculation is rife.
With the collaboration of André Dubuc, Press