By Hannah Lang, Carolina Mandl and Elizabeth Howcroft

(Reuters) – Celsius Network, the retail crypto lending platform whose liquidity problems have sent cryptocurrencies plunging, stumbled on complex investments in the wholesale digital asset market in what analysts say was akin to a traditional bank run.

Citing extreme market conditions, New Jersey-based Celsius this week froze withdrawals and transfers between accounts “to stabilize liquidity.” In a video on Friday, the company’s finance chief said Celsius, along with the industry, had seen redemptions rise following the collapse of cryptocurrency TerraUSD in May.

Cryptocurrencies have since lost over $400 billion in value.

Similar to a bank, Celsius gathers crypto deposits from retail customers and invests them in the equivalent of the wholesale crypto market, including “decentralized finance” or DeFi sites that use blockchain technology to offer services from loans to insurance outside the traditional financial sector.

Unlike banks, Celsius promises retail customers huge returns, sometimes as much as 18.6% annually. The lure of big profits has led individual investors to pour assets into Celsius and platforms like it. Its CEO Alex Mashinsky said in October Celsius had $25 billion in assets, although that had fallen to around $11.8 billion as of last month, its website showed.

Celsius appears to have stumbled on its wholesale crypto investments, according to public blockchain information and analysts who track such data. As those investments soured, the company was unable to meet redemptions from customers fleeing amid the broader crypto market slump, analysts said.

“This is the closest we’ve seen to a bank run” in the cryptocurrency sector, said Noelle Acheson, head of market insights at Genesis, a digital currency prime brokerage.

Mashinsky and a representative for Celsius did not respond to requests for comment. The company said on Sunday it was taking steps to meet redemptions but “there may be delays.”

Celsius’ problems date back to at least December when, at the hands of hackers, it lost $54 million worth of bitcoin it had invested with DeFi platform BadgerDao, according to public blockchain data. At the time, Mashinsky said Celsius lost money, but did not disclose how much.

Celsius had also invested in the Anchor protocol which offered up to 20% returns on deposits of TerraUSD. As TerraUSD fell, Celsius pulled more than $535 million in crypto assets from Anchor, according to public blockchain data.

Mashinsky said in a May interview that its exposure to TerraUSD was small relative to its assets but did not say if the company had lost money.

The company’s biggest misstep, though, appears to have been its decision to invest customers’ ether tokens with Lido Finance, a DeFi platform offering investors the chance to profit from a new version of ether that is in development. The investments are known as “staked” ether, or stETH.

Celsius promised customers between 6% and 8% returns on ether deposits. It had at least $450 million in stETH in its primary DeFi wallet, but likely has more stored elsewhere, according to Andrew Thurman, an analyst at analytics firm Nansen, which tracks blockchain data.

While one stETH is supposed to be redeemable for one ether, stETH’s price has dropped compared to ether in recent weeks as the crypto market fall prompted holders to dump their stETH.

That discrepancy will have made it difficult for Celsius to convert its stETH back to ether to meet customer withdrawals, said analysts.

“Everybody … could see that they had positions that were significantly under risk,” said Thurman.

The slump in bitcoin, which has shed about half its value this year, has also pressured Celsius. It pledged crypto assets pegged to bitcoin as collateral against a loan of other cryptocurrencies, according to Thurman. As bitcoin fell, Celsius had to top up that collateral, said Thurman.

In 2019, Mashinsky told the Financial Times that Celsius had crypto loans collateralized with bitcoin.

“The whole thing is just mispriced risk,” Cory Klippsten, CEO of crypto investment platform Swan Bitcoin, said of Celsius’ business model.

CONTAGION WORRIES

Celsius has hired restructuring lawyers, the Wall Street Journal reported Tuesday. Its problems have sparked fears that other crypto lending platforms may be at risk of investor runs.

On Tuesday, the chair of the U.S. Securities and Exchange Commission said such platforms operate a bit like banks and that promised high returns might be “too good to be true.”

Celsius’ peers have been quick to distance themselves from stETH. On Monday, New Jersey-based BlockFi tweeted it does not hold any stETH principally or as collateral. Voyager Digital, also New Jersey-based, tweeted it has never engaged in DeFi lending activities and has no exposure to stETH.

But according to Thurman, several other crypto lending platforms, such as Aave, invest in stETH and pledge it as collateral. If it continues to drop relative to ether, there is a “risk of pretty significant liquidations.”

Aave did not respond to requests for comment.

(Reporting by Hannah Lang in Washington, Elizabeth Howcroft in London and Carolina Mandl in New York Additional reporting by Tom Wilson in London; Editing by Michelle Price and Mark Potter)