The Daily - Death of a Crypto Company

Episode Date: July 25, 2022

Born in response to the 2008 financial crisis, cryptocurrency was supposed be a form of money that eliminated the traditional gatekeepers who had overseen the tanking of the economy.But a crash in value recently has raised questions about cryptocurrency’s central promise.Guest: David Yaffe-Bellany, a reporter covering cryptocurrencies and fintech for The New York Times.Want more from The Daily? For one big idea on the news each week from our team, subscribe to our newsletter. Background reading: No one wanted to miss out on the cryptocurrency mania. A global industry worth hundreds of billions of dollars rose up practically overnight. Now it is crashing down.Celsius Network was managing more than $20 billion in assets. Last month, it became the latest crypto venture to spiral into a crisis.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Sabrina Tavernisi. This is The Daily. Let's talk about cryptocurrency. We've talked about the markets getting damaged this week. Cryptocurrency is literally in a death spiral. When the financial downturn of the past few months led to a crash in the value of cryptocurrency, several cryptocurrencies collapsed, even those believed to be among the most stable. It raised questions about crypto's central promise as money that existed outside the financial system. Today, my colleague David Yaffe-Bellamy on One Crypto Company and why its downfall tells the story of how crypto became the thing it was trying to reject. It's Monday, July 25th.

July 25th. David, for a while now, we've been talking about the decline in the stock market, which, as you know, has just had its worst six months in more than 50 years. But we've also seen this really steep drop in the value of cryptocurrencies, which you cover. So where do things stand now? So the stock market's tanked over the last few months. People have seen their savings disappear practically overnight. That's true of the traditional markets, and it's also true of crypto. Since last year, about $2 trillion in value in the crypto market has disappeared. All those coins that you hear about, they were worth about $3

trillion. Now they're only worth about $1 trillion. Oh, wow. And it's surprising on some level that that decline in crypto has tracked what's happening in the traditional markets because crypto was supposed to be an alternative to that. Okay, so explain that. I mean, why would anyone think that cryptocurrency should have moved differently from the stock market? I mean, in my mind, I kind of think of crypto as kind of like a stock. So to understand that, I think you have to go back to the origins of crypto, which date to the period following the 2008 recession.

Financial institutions are in trouble. 158-year-old Lehman Brothers filed for bankruptcy. So remember, big banks had collapsed. They didn't do that worst-case scenario risk assessment. One hundred and fifty-eight year old Lehman Brothers filed for bankruptcy. So remember, big banks had collapsed. They didn't do that worst case scenario risk assessment, and today the worst is in front of their faces. They've taken risks with people's money. Under the bailout, the Treasury can buy up to $700 billion in bad assets from financial firms. They've been bailed out by the government.

The bankers inside here are responsible for the crisis. They're getting rewarded while the people who are the victims of this crisis are being punished. There was a sense that Wall Street types had endangered the economy and that regular people were suffering as a result of their recklessness. Paying for something without hard cash, credit cards or checks, it's a new form of virtual payment known as Bitcoins. And crypto emerges partly as a kind of response to that. It's an online currency, one not controlled by any government

or any single company even. It's a form of money that eliminates traditional financial gatekeepers. It's all online. Every transaction is recorded on this kind of public ledger called a blockchain. A lot of people in their 20s, they really like this Bitcoin. It's taking on a lot of support because people find you don't have to deal with banks. It's online currency. And so I think the younger generation is really going to start to click with this more.

People who have really deep libertarian ideology are attracted to it. A kind of techno-utopian type are attracted to it. The much more important factor here is that what Bitcoin can do in theory is protect people from their own governments. The Federal Reserve can make money less valuable, the money that you have, that you earned. And they have this sort of grand vision of a world in which people can conduct commerce, send money to each other, buy and sell things without relying on the government or private companies that serve as gatekeepers to the financial system. So how does this grand vision of crypto go? I mean, is cryptocurrency working as it was envisioned? Well, at first, it was working. People were willing to put significant amounts of money into cryptocurrency. But in those early years, the main application was crime. There was an early internet marketplace called Silk Road that was basically run on cryptocurrency. People would pay in Bitcoin and they would have

drugs delivered to their front door. And it was very effective for a lot of people and it demonstrated that they trusted the system enough to use it for a risky transaction. It was a fast and easy way to send money over long distances. It wasn't super trackable and it still maintained a decent amount of value. So that was the kind of early reputation of crypto. It sort of became synonymous with crime in the public eye. And for some of the kind of hardcore libertarian proponents of the technology, that wasn't necessarily a bad thing, especially the kind of drug dealing element of this. I mean, these are people who in some cases object to all sorts of drug laws and who had kind of envisioned a system that existed outside of the government's control. And this was

a kind of execution of that. But for others, this was a big problem. They wanted cryptocurrency to be cleaned up or they wanted to demonstrate to the public that there were uses of the technology that were more transformative than just allowing people to pay for drugs in a convenient way. than just allowing people to pay for drugs in a convenient way. So in the first few years, crypto was basically drug dealers and these kind of bro-y nerds on the edges of the internet. But the hope was that it could attract a much wider group of people. Yes, and over the years that gradually starts to happen. We see new entrepreneurs come into the industry

with more traditional business backgrounds. There's this kind of pattern of boom and bust cycles where new experimental currencies enter the industry and attract a big following before disappearing. And that pattern keeps playing out until a sort of major turning point, the pandemic. And that's when crypto really starts to hit the mainstream. People are spending a lot of time at home. They're online, where the crypto community is at its fiercest. They have stimulus checks coming in, which for some people is a kind of source of extracurricular play money that they can spend on these sort of experimental investments. New coins are starting up. A $10 investment for some people is turning into $100 and then $1,000. And it's just so much more exciting and satisfying than the

traditional markets where gains are usually slow and steady. Big crypto companies are rolling out a kind of ad blitz. They're encouraging people to invest. Celebrities are endorsing cryptocurrencies. Athletes are getting in on it. You know, as the hype was building, the Staples Center, where the LA Lakers play, was renamed the Crypto.com Arena. I remember there was even an ad in the Super Bowl, right?

In fact, there were multiple Super Bowl ads and really well-funded marketing campaigns by some of these crypto companies. History is filled with almosts. There's an ad starring Matt Damon for a crypto company where he sort of walks down this long cavernous hallway, past images from different moments in history. Then there are others, the ones who embrace the moment and commit.

There are some astronauts involved, and he says, With four simple words that have been whispered by the intrepid since the time of the Romans, fortune favors the brave. Fortune favors the brave. Oh, boy. And that's his message to the audience.

You know, go invest in crypto. Don't miss this opportunity. And that's really kind of the archetype of crypto advertising. It really relies on FOMO, fear of missing out, on encouraging people to get in on this sort of once-in-a-lifetime opportunity, this chance to sort of be on the ground floor of something really big,

pressing this idea that if you don't buy crypto now, you'll feel like a loser. So this is when crypto goes mainstream, right? It's not just for libertarian types or for drug dealers. It's for everyone. Yes. And what happens is that people start to capitalize on the hype. You've got entrepreneurs who've been around crypto for a really long time who see a kind of golden opportunity. It's more popular than it's ever been before. And so you get all of these startups, some of which had existed before the pandemic, some of which started to gain steam only once people were in lockdown, that offer a kind of financial structure around cryptocurrency. They're not new coins.

They're ways to invest your coins. There's even something that basically resembles a crypto bank. A bank? I thought they hated banks. I thought the whole point was that they were not banks. Yeah, it's a little surprising and unusual. And these companies don't call themselves banks. They're not regulated as banks.

But essentially, they're acting as banks. You put in your crypto, so the 10 Bitcoin that you saved up over however many years, and you earn a yield on that interest, the same way that you'd get interest on a savings account. One of the best examples of this is a company called Celsius. It advertises itself as a kind of alternative to the traditional bank, and it's founded by this sort of classic crypto character. Good morning, New York.

A guy named Alex Mashinsky. All right, how many of you heard of Celsius before? Very few, that's good, you know. He's charismatic, a really big talker with a little bit of a sketchy background. He used to peddle confiscated hair dryers and VCRs before starting a bunch of companies. And I'm the inventor of Voice over IP. If you don't believe it, my last name, Google it, you'll check it out.

He's been accused over the years of exaggerating some of his business accomplishments. I actually looked at Bitcoin in 2010, and I was like, that's the dumbest idea I've ever seen. And then like so many of these people who kind of existed on the fringes of the technology world, he discovers crypto. So it took me three years to admit that I was totally wrong. But today...

So what was his pitch? What was the story that he was totally wrong. But today... So what was his pitch? What was the story that he was selling? So it really kind of traced back to some of the early ideas of crypto. You have to ask yourself, who's telling you the truth? Who's paying you fair value? And who is basically trying to get away

with giving you nothing for your money? He argued that the traditional banks were essentially cheating the public. You get paid, right? You put your money in He argued that the traditional banks were essentially cheating the public. You get paid, right? You put your money in a bank account. The bank takes your money and immediately lends it to me on my credit card. They pay you less than 1% on your deposit,

and they charge me 25% on my credit card, right? You deposit your money. The banks maybe lend it out. They get big returns for themselves, and they only give you a tiny slice of those profits in the form of interest. So the problem is we all get used to the fact that no one wants to care for us. No one wants us to do better. And we accept that.

We're willingly giving our money to people who steal from us every day. And he insisted that Celsius would do the opposite. It would take your money, invest it, generate those big returns, but then give you the bulk of the capital and help you achieve those huge returns and make money on your money. We have much less risk, but we managed to deliver high single digit, low double digit numbers, which just shows you again how much these banks are stealing from you.

It was a good time to be making that type of pitch. You know, he would go on YouTube every week. He was super online. He was tweeting all the time. And during the pandemic, people were sitting at home and they were sort of perfectly situated to kind of hear that message. We deliver yield. We pay it to the people who would never be able to do it themselves. We take it from the rich and we beat the index. Okay, that's like going to the Olympics and getting 15 medals in 15 different fields. Okay? So he's preaching the gospel of crypto, and it's really resonating. Exactly. and it's really resonating.

Exactly. You know, this is also a time when people are feeling distrust of major institutions, when people are sort of straining financially. And he promised a kind of magical-sounding solution to that. You hand over your money and you get huge returns without really having to do anything. And what kind of returns was he promising? Like a lot of these other crypto banks, he was promising returns as high as 18%.

So that's a substantial improvement on the 1% to 2% a year that you'd be getting in a savings account. It sounds like a life-changing amount of money for a lot of people. And it requires literally zero effort. And people thought about this as a kind of safe option. It wasn't like a stock or even like a cryptocurrency where you buy it and hope that the price will go up, but know that you're risking the price will go down. The idea is that you have a principle that you put in, and you're guaranteed that that's safe, and then you get extra money on top of it. So people didn't think about this as a gamble. They thought about it as free money. So how does Mashinsky say he's doing it? So it was never entirely clear what the exact recipe was for those big returns.

But at a very high level, he was taking the money that customers put in, lending that out or lending some portion of it out to other investors, professionals in the broader market who are interested in finding new ways to profit on cryptocurrency. And those investors were paying interest back to Mashinsky, and he was passing that along to the customer. And exactly how the numbers added up was a little bit opaque, but that was basically how it seemed to work. But David, do people believe Mashinsky?

I mean, it sort of seems too good to be true, right? Well, there were certainly plenty of critics, economists, other financial experts, who pointed out that there's no such thing as free money in the traditional finance system. And really, there's no such thing as free money in this newfangled crypto economy either. A lot of those critics said,

this looks like a Ponzi scheme. Maybe the way Mashinsky is generating those huge returns is taking the new money that flows in and using that to pay interest to the people who'd kind of originally deposited their funds. Adding to these concerns was the fact that in a traditional bank, deposits are insured by the federal government. And that didn't exist at Celsius. But a lot of people still bought into this vision. This was a time during the pandemic of major anti-institutional sentiment. People's finances were being strained.

They saw this as a way to generate a lot of money quickly. And they thought it sounded safe too. It wasn't like a traditional cryptocurrency where you're betting on the price going up, but you know that it could go down. It was sort of like a savings account except turned up to 11. So, David, what was Celsius at this point? I mean, how would you describe what it was a symbol of the radical optimism of crypto. The fact that people really bought into this vision, that they truly believed that this new technology could create routes to transformative wealth and change their lives overnight. But it was also a symbol of the recklessness of crypto.

The fact that entrepreneurs were willing to come in and experiment with regular people's money. And eventually, that recklessness caught up with Celsius. We'll be right back. We'll be right back. So, David, you talked about Celsius as this poster child for crypto in a way, and everything that was happening during this period of the bubble getting bigger. So when do things start to go wrong? It really starts early this year when a kind of series of economic storm clouds gather that ultimately destabilize the broader market.

So there's Russia's invasion of Ukraine. There's the lingering effects of the pandemic and the way those were unsettling global supply chains. There's the Fed's decision in March to raise interest rates. And that really puts the brakes on this long period of kind of exuberant growth in the stock market and also in crypto. Investors' risk appetite for crypto forcing a significant pullback in crypto prices over the past couple of weeks. And as you look at Bitcoin now... Suddenly people lose their appetite for risky investments. The broader economic situation is not looking as great. And so something as experimental as crypto

isn't as attractive as it was a year earlier. Bitcoin, the biggest and best-known digital currency, has lost half its value. This week... Ethereum seeing a major slide in recent days, mirroring the recent decline in the broader markets. So cryptocurrency prices start dropping. The stablecoin TerraUSD broke its one-to-one peg to the dollar, plunging as low as 26 cents this morning. Even a coin

called TerraUSD, which was specifically designed to maintain a constant value of one dollar and to stay stable at that value, lost a lot of its value overnight. The nosedive sending shockwaves all across major crypto exchanges, wiping out nearly $200 billion in wealth overnight. But then something different and worse starts happening, which is that crypto projects implode. And suddenly there's this domino effect across the industry where it feels like everything's collapsing at once and tens of billions of dollars are vanishing. And this happened at exactly the worst time for Celsius because people were getting nervous about the market and they wanted their

money back. They wanted to withdraw their deposits and the interest that they'd accumulated. The more deposits they have, the more they can do business. But as soon as you see sort of a run on the bank, it falls apart. And we're seeing that play out in real time in Celsius. It was basically the digital equivalent of a bank run. This week, Celsius halted withdrawals and transfers, citing extreme market conditions in a memo to its 1.7 million clients.

And in June, Celsius made an announcement that really kind of shook the foundations of the crypto world. All that money that people had deposited, you know, the billions of dollars worth of cryptocurrency was now locked up and nobody could get it out. To be honest, there's just kind of questions about the transparency of Celsius because nobody knows when they're going to let up on this at the moment. And that had an effect on the broader crypto market. It sent prices tumbling even more. Crypto winter is upon us. Prices are falling. Celsius has frozen its users access to their funds. So if you're not sure what any of that means, well, things are going

very badly in the crypto world. And then, you know, a few weeks later. Another day, another crypto company filing bankruptcy. This time it is Celsius filing for Chapter 11 protection. Celsius entered bankruptcy proceedings. CEO Alex Mashinsky now saying in a statement, this is the right decision for our community and company. And now it's really not clear when or whether anybody will get their money back or how much money they'll get back. The big question now, what will that customer crypto be seen by as the court? Right now, it's looking like an unsecured loan,

meaning they may be entitled to nothing. So we're seeing all of this crypto basically evaporate. But should we really have been surprised? I mean, everybody knew that crypto was a gamble, right? Well, a lot of people who put their money into crypto feel swindled. They feel like they were promised a level of safety that they didn't ultimately get with ventures like Celsius. And my colleagues and I have talked to a lot of these people over the last couple of months, and they didn't just lose, you know, play money that they thought might generate some quick wealth, but wasn't really essential in their day-to-day lives. These people

lost money that was going to go toward paying off credit card debt. They lost savings that they were going to spend on a new house. And when you talk to these people, you sort of hear really sad stories. I mean, people whose mental health was affected who contemplated suicide. One pattern that we saw in the early days of the crash was that on Reddit forums for different types of cryptocurrencies, people would pin suicide hotline information because there was so much discussion of self-harm due to the really dramatic consequences of the crash. You know, people had pinned their hopes and dreams on crypto and suddenly that was all collapsing around them. Was there somebody in particular, David, you'll really remember? I talked with one guy who had a dream of opening a brewery, and he built up savings in crypto that he planned to use for that.

You know, this was a serious amount of money for him in the tens of thousands of dollars, and he was planning to put it toward a life dream. And then he lost it all in the crash. And after losing it all, he felt this real sense of resentment that a lot of people, a lot of seemingly reputable people, had a lot of confidence in the crypto economy, had advertised it to him, marketed it to him, told him that this was a route to wealth and that certain forms of crypto investment were actually safe, and that he'd gotten screwed over and been

a victim of that hype machine. And I remember he told me the smaller people get taken advantage of. That was what he walked away with from this experience. That the big players sell this fantasy and the regular guy loses out. David, it feels like crypto started out by saying it was creating a world apart from traditional finance, like making its own planet, right? Far from Wall Street, far from banks. But in the end, even as these crypto companies lured people in with this very lofty rhetoric against, you know, those kinds of institutions, crypto really just kind of ended up recreating them. That's been one of the central frustrations for a lot of the kind of idealists who got into crypto

early, that they wanted to eliminate centralized institutions and financial gatekeepers. But what we've seen in this collapse, particularly with Celsius, is a centralized entity that took people's money, made risky bets, and then caused all sorts of harm for ordinary Americans. And that sounds like exactly what happened in 2008, exactly the dynamic that crypto was designed to reverse. They've called the collapse of Celsius crypto's Lehman moment. the collapse of Celsius crypto's Lehman moment. And as the dominoes have fallen over the last couple of weeks, we've seen exactly the same complex financial engineering and sort of interconnected economic infrastructure that characterized the pre-2008 Wall Street that resulted in all that harm. And so really, crypto is just repeating the history that it was designed to correct. David, is crypto dead?

I think it's too soon to say that. It's certainly lost a lot of value over the last few months. There are certainly a lot more doubters and skeptics than there were even a few weeks ago. But not every crypto project has collapsed. There's still tens of billions of dollars invested in the crypto economy. Venture capitalists continue to invest, though that's slowed down a little bit recently. And it's left this kind of cultural imprint. Prices have gone down, but everybody knows about crypto now. People talk about the ideas behind crypto. People are fascinated by it. They want to know what's going to happen with it next.

And that doesn't seem like something that's likely to disappear overnight as a result of a crash. Also, when you talk to crypto people, to the true believers, they'll often frame this moment as a kind of necessary period of experimentation. Sure, some projects will crash, but others will survive. And actually, this is a moment where you sort out the really significant applications of this technology from the ones that are too risky or that were put together by the wrong people. A lot of crypto boosters compare this moment to the dot-com bubble. A bunch of

companies died during those sort of early internet years, but that didn't mean that there was something fundamentally wrong with the internet itself. And obviously it's transformed society and some of the biggest companies in the world have emerged from that period. So that's the kind of crypto-optimist take

that we're in this kind of winnowing moment that will actually make the industry stronger. And what's the crypto pessimist take? The most extreme crypto pessimist take is that it's all a scam, that we've only seen the first couple dominoes drop, and that there's more to come. That some of the biggest, most reputable crypto projects are built on shaky foundations, just like Celsius, and that they're going to topple soon as well. And that that will cost more people more money

and cause more pain unless the government steps in and builds some sort of safety net or some sort of regulatory structure that shuts down this kind of risky crypto ecosystem before it becomes so big that the consequences of its collapse would be even more devastating than what we've seen over the last couple months. But I think a lot of people who are deeply skeptical of crypto would acknowledge that crypto correctly diagnoses

real problems in the mainstream finance system. There's just a lot of doubt now, a lot of very legitimate doubt about whether crypto is actually the solution to that problem, whether a blockchain technology that allows people to operate without these gatekeepers, whether that's an achievable ideal, or if it's just kind of doomed to resemble the system that it was supposed to replace. David, thank you. Thanks for having me. We'll be right back. United States and its allies in Europe were wielding their power unfairly against poorer countries. Russia blames the West for grain and fertilizer shortages that are a consequence of the war in Ukraine. And Mr. Lavrov's trip to Egypt, Ethiopia, Uganda, and the Republic of Congo

was an effort to turn the hunger and social strife across the continent to Russia's advantage. the hunger and social strife across the continent to Russia's advantage. The trip follows a breakthrough agreement announced on Friday to free more than 20 million tons of grain stuck in Ukraine's blockaded Black Sea ports. The deal capped weeks of negotiations and was the first significant agreement between Russia and Ukraine since the war began. However, the day after the deal was struck, Russia launched missiles that hit the port of Odessa, a large grain storage point, raising questions about Russia's commitment to honoring it.

And scorching daily temperatures broke records throughout the Northeast on Sunday as major cities dealt with sweltering heat. In New York, at least one person died from heat-related causes, while in Philadelphia, officials declared a heat emergency. In Boston, the Boston Triathlon was postponed after temperatures reached 100 degrees, surpassing the city's previous record, set in 1933.

Today's episode was produced by Will Reed, Rob Zipko, and Sidney Harper. It was edited by John Ketchum, Lisa Chow, and Mark George. Contains original music by Dan Powell, Marian Lozano, and Rowan Nemisto, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Sabrina Tavernisi.

See you tomorrow.