Celsius freezing withdrawals

In June 2022, the cryptocurrency world was shaken when Celsius Network, one of the largest and most recognized crypto lending platforms, abruptly froze withdrawals, swaps, and transfers for its users. This decision locked billions of dollars in customer assets and set off a chain of events that ultimately led to bankruptcy proceedings, lawsuits, regulatory scrutiny, and criminal charges against its founder, Alex Mashinsky.

The Celsius saga is not just the story of one company—it is a cautionary tale of unchecked risk-taking, opacity, and overconfidence in an industry that promised financial freedom but delivered financial ruin for many.

1. Celsius Network: The Business Model

Celsius, founded in 2017, pitched itself as a “new kind of bank” for digital assets. Its business model revolved around:

• High-Yield Earn Accounts: Customers could deposit cryptocurrencies like Bitcoin, Ethereum, or stablecoins and earn yields that sometimes exceeded 10–15%.

• Crypto-Backed Loans: Users could borrow against their crypto holdings, giving them liquidity without selling their assets.

• Institutional Lending: Celsius lent customer deposits to institutions, hedge funds, and decentralized protocols, profiting from spreads between borrowing and lending rates.

By late 2021, Celsius claimed to manage over $20 billion in assets and had 1.7 million users worldwide. The company presented itself as safer and more transparent than banks, even adopting the slogan “Unbank Yourself.”

But the reality was very different. Celsius was deeply entangled in risky strategies and re-hypothecation of customer deposits, which created fragility that would become exposed during the 2022 crypto downturn.

2. The Freeze: June 12, 2022

On June 12, 2022, as Bitcoin and other cryptocurrencies tumbled in the wake of the Terra/Luna collapse, Celsius announced that it was freezing all withdrawals, swaps, and account transfers. The company cited “extreme market conditions” and said the freeze was necessary to stabilize liquidity.

The statement shocked the market. Within hours:

• Bitcoin’s price plunged below $25,000.

• Ethereum dropped under $1,300.

• Investors panicked as billions of dollars were suddenly locked inside Celsius.

For many users, this meant losing access not just to speculative assets but to life savings. Unlike banks, Celsius deposits were not insured by the FDIC or any government safety net.

3. What Went Wrong?

a) Market Crash and Liquidity Stress

Celsius had invested customer deposits in long-term and illiquid strategies, including decentralized finance protocols and staking services. When crypto prices collapsed, customers rushed to withdraw funds, but Celsius did not have the liquidity to meet those demands.

b) Over-Leveraging and Risky Bets

The company engaged in leveraged trading and speculative investments, including exposure to Terra’s algorithmic stablecoin ecosystem. When those bets soured, balance sheets quickly deteriorated.

c) Bank-Run Dynamics

Much like a traditional bank run, customer panic led to surging withdrawal requests. But unlike a bank, Celsius lacked central bank backing or deposit insurance. The model unraveled overnight.

4. Immediate Fallout for Customers

The freeze left 1.7 million users with no access to their funds. Many reported that they had invested their savings or retirement accounts, lured by Celsius’s high-yield promises.

The restrictions were absolute:

• No withdrawals of cryptocurrencies or stablecoins.

• No swaps between assets.

• No transfers between accounts.

Online forums and social media exploded with anger, despair, and accusations of fraud. For many, the freeze was indistinguishable from outright insolvency.

5. Bankruptcy Filing

On July 13, 2022, one month after freezing withdrawals, Celsius formally filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York.

Key details from the filing:

• Assets: Approximately $4.3 billion.

• Liabilities: Approximately $5.5 billion.

• Deficit: Roughly $1.2 billion.

• User Deposits: About $4.2 billion of customer funds held in “Earn” accounts.

Perhaps the most shocking development came when a judge ruled in early 2023 that Celsius legally owned the crypto deposited in Earn accounts. Because customers had agreed to terms of use that transferred ownership to Celsius, those users became unsecured creditors—standing at the back of the repayment line.

6. Lawsuits and Fraud Allegations

Celsius’s collapse triggered a storm of lawsuits and regulatory actions.

• Civil Lawsuits: Former business partner KeyFi sued Celsius, alleging it ran a Ponzi scheme by using new customer deposits to pay existing yields.

• Regulatory Scrutiny: State regulators and the U.S. Securities and Exchange Commission began probing whether Celsius had misled investors about its financial health.

• Fraud Allegations: In 2023, the New York Attorney General filed suit accusing founder Alex Mashinsky of misleading investors about Celsius’s risks and safety.

7. Founder Alex Mashinsky’s Fall

Alex Mashinsky, Celsius’s charismatic founder and CEO, became the face of the scandal. He had long touted Celsius as safer than banks and repeatedly dismissed concerns about risk.

But investigations revealed a different picture:

• Celsius had misrepresented its reserves.

• The company took risky leveraged positions with user funds.

• Mashinsky allegedly cashed out millions while encouraging users to hold.

By late 2023, Mashinsky faced securities fraud and commodities fraud charges. In 2024, he pleaded guilty, and in 2025, he was sentenced to 12 years in prison.

8. Restructuring and Partial Recovery

In early 2024, Celsius emerged from bankruptcy with a restructuring plan approved by the court. The plan included:

• Returning more than $3 billion in crypto and cash to creditors.

• Issuing equity in a new company, primarily focused on Bitcoin mining, to creditors.

• Continuing lawsuits against FTX, Alameda, and other bankrupt entities to recover additional funds.

For many customers, however, this meant only partial recovery—often pennies on the dollar compared to their original deposits.

9. Broader Impact on the Crypto Industry

The Celsius crisis was part of a larger contagion in 2022–2023:

• Voyager Digital and BlockFi also froze withdrawals and later filed for bankruptcy.

• Three Arrows Capital, a major hedge fund, collapsed, leaving billions in unpaid loans.

• FTX itself, once seen as a savior, imploded in November 2022.

Together, these collapses revealed how interconnected and fragile the crypto lending ecosystem had become.

10. Regulatory Lessons

Celsius’s implosion accelerated global calls for stricter crypto regulation. Key lessons included:

1. Transparency Requirements: Companies must disclose how user deposits are used.

2. Consumer Protection: Earn products marketed as “safe” must be regulated like securities or deposits.

3. Segregation of Funds: Customer assets should remain separate from company balance sheets.

4. Insurance Mechanisms: Similar to FDIC or SIPC insurance, crypto products may need protective backstops.

11. Timeline of Events

• 2017: Celsius founded.

• 2021: Assets under management peak at $20+ billion.

• May 2022: Terra/Luna collapse begins contagion in crypto markets.

• June 12, 2022: Celsius freezes withdrawals.

• July 13, 2022: Celsius files for Chapter 11 bankruptcy.

• January 2023: Court rules Celsius owns customer deposits.

• Late 2023: Mashinsky charged with fraud.

• Early 2024: Celsius exits bankruptcy with partial recovery plan.

• 2025: Mashinsky sentenced to 12 years in prison.

12. Investor Lessons

For crypto investors, the Celsius debacle is a painful reminder that:

• High yields always carry high risks.

• If you don’t control the keys, you don’t control the coins. Centralized platforms can seize or freeze funds at will.

• Contracts matter. The court’s ruling on Earn accounts shows that terms of service can strip users of ownership rights.

• Diversification is crucial. Putting all funds in one platform is a recipe for disaster.

Conclusion

The freezing of withdrawals by Celsius in June 2022 will be remembered as one of the defining moments of the crypto winter. What began as a liquidity pause turned into a full-scale collapse that destroyed billions in investor wealth, tarnished the reputation of crypto lending, and led to criminal convictions.

Yet, from the wreckage come important lessons: the necessity of transparency, the importance of regulatory safeguards, and the critical role of self-custody in protecting investors.

The Celsius saga, while devastating for many, may serve as the catalyst for building a safer and more mature digital asset ecosystem in the years ahead.

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