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Want to keep exchanges like Celsius from seizing your money? Be a ‘custody client’

Are your coins at risk of being seized by an exchange in the future? Here are some factors to consider related to using centralized exchanges.

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Are your coins at risk of being seized by an exchange in the future? Here are some factors to consider related to using centralized exchanges.

Disgraced cryptocurrency lender Celsius Network asked a court this month to return assets to its “custody clients,” but not to its “earn-and-borrow” customers. Wondering how to keep yourself in the former group when the crypto exchange you’re using goes under? Here’s a summary.

What exactly is a “custody client?” It’s similar in principle to a savings account with a traditional bank — often repayable upon demand by the custodian. In this case, it’s Celsius that has a fiduciary responsibility.

This type of account is kept separate from an “earn-and-borrow” account. It includes coins that can be transferred, swapped or used as loan collateral, but they don’t earn rewards. Purchased or transferred coins will go to your custody account. It is estimated Celsius has approximately 74,000 custodian accounts.

Related: Celsius, 3AC demonstrated why more financial activity needs to be on-chain

In contrast, coins in your earn-and-borrow account will earn rewards but can’t be swapped or used as loan collateral. This applies to stakers and — obviously — borrowers.

The bankruptcy court has scheduled a hearing for Oct. 6. The argument Celsius put forward is that custody clients retained “beneficial ownership” of their coins, so they don’t form part of Celsius’ bankruptcy estate.

Financial Statement from Celsius Network's Bankruptcy Filing

Celsius follows Voyager Digital and Hodlnaut, which, on Aug. 29, were put under interim judicial management — “intensive care” in insolvency speak. And they will not, in my view, be the last during this crypto winter. Crypto carnage is underway, but the question is: What key lessons can be learned from Celsius’ downfall? Are your coins at risk of being placed in the “wrong kind of account” in the future? Let’s examine.

Related: Hodlnaut cuts 80% of staff, applies for Singapore judicial management

Celsius, founded in the United States in 2017, claimed to have 2 million users across the world as of June 2022. It had raised substantial sums from investors, estimated at $750 million as of late 2021. The company’s business model drew some parallels to a traditional bank — using the concept of fractional reserving — receiving deposits from crypto investors searching for a yield and, subsequently, providing loans to earn a margin, profits if you like. But what factors and events possibly contributed to Celsius’ demise into its unenviable position — the insolvency abyss?

Firstly, it seems as though Celsius’ strategy relied upon a continuous bull market to keep liquidity flowing — more new users depositing on the platform to satisfy the rewards and withdrawals of existing users. A Ponzi-type structure? Perhaps. A strategy orchestrated by leadership — most definitely. They decided to bet on either black or red, compounded by overall poor investment decisions. According to numerous sources, Celsius CEO Alex Mashinsky took control of Celsius’ trading strategy only a few months before its demise, often overruling experienced investment managers.

Related: Celsius CEO personally directed crypto trades months before bankruptcy

In addition, it often positioned itself as a high annual percentage yield (APY) provider relative to other decentralized finance (DeFi) platforms — particularly, its CEL tokens, where returns of 20% were being offered. This raises the question as to whether such rates were sustainable in a cyclical downturn. When lending out depositors’ crypto, it seems the risk profile of these borrowers was high — high in reference to credit and default risk. Traditional banks have had decades of experience and data to draw upon and refine their credit risk procedures before lending. I doubt Celsius had the same depth of expertise.

And then came the liquidity crunch came — similar to the run on the Northern Rock bank in the United Kingdom back in the 2008 financial crisis. Because of the concept of fractional reserving, no bank or lending institute is able to simultaneously satisfy withdrawal demands if a proportion of depositors all come calling at once. Celsius recognized this and thus froze withdrawals and trading activity as soon as the alarm bells rang.

On balance, whatever its fate, Celsius has contributed to the development and evolution of crypto and DeFi, akin to inventors whose ingenious inventions just fell short of commercial success. They played a vital role in the process and allowed others to succeed. Valuable lessons can be learned, and the teachings applied.

Related: Sen. Lummis: My proposal with Sen. Gillibrand empowers the SEC to protect consumers

Further mitigating factors reside in a series of crypto events — Terra’s LUNA Classic (LUNC) and TerraClassicUSD (USTC) crash and the BadgerDAO hack. Celsius had exposure to both, which culminated in a financial impact that punched holes in its balance sheet. Macroeconomic events of rising global inflation no doubt played a part. With a glut of “new money” printed by governments during the pandemic, its increasing velocity through the system coupled with supply chain issues only added more fuel to the crypto speculative bubble and bust.

So, what are three key lessons that can be learned from Celsius’ plight?

Firstly, whether you are a custody or earn-and-borrow account holder, it will come down to the facts — it’s not a matter of choice. While it will almost certainly boil down to a legal determination, in my opinion, the economic substance of your activity should be considered. Even then, I suspect Celsius will argue for a narrow definition of “custody” in this context, and don’t be surprised if there are clawback clauses. They have openly stated their intention to file a plan that will provide customers with an option to remain long crypto.

Secondly, it’s become a bit of a cliché, but the mantra of “not your keys, not your coins” rings true. The risks of custodial wallets are now apparent. Investors whose crypto is locked on a platform are more likely to suffer losses. Under insolvency laws, investors are classified as unsecured creditors, and even if they are a custody client, the probability is they will receive a fraction — if anything at all — of their portfolio value.

Related: What will drive crypto’s likely 2024 bull run?

Lastly, if an APY reward is too good to be true, then perhaps it is. In Celsius’ case, the problem was compounded by the offering of near sub-zero loan interest rates of 0.1% APY. Simple math suggests its business model was not robust at all.

Only time will tell what emerges from the rubble of this catastrophe. If history is to teach us anything, it is that bear markets are often the catalyst for attention to be focused on innovation and utility — the Web 1.0 and 2.0 dot.com era is testimony to this. Consolidation, mergers and acquisitions are definitely on the horizon, and with it will emerge the new Amazons and eBays of the cryptoverse.

Tony Dhanjal serves as the head of tax strategy at Koinly and is its PR and brand ambassador. He is a qualified accountant and tax professional with more than 20 years of experience spanning across industries within FTSE100 companies and public practice.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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Spread & Containment

Another beloved brewery files Chapter 11 bankruptcy

The beer industry has been devastated by covid, changing tastes, and maybe fallout from the Bud Light scandal.

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Before the covid pandemic, craft beer was having a moment. Most cities had multiple breweries and taprooms with some having so many that people put together the brewery version of a pub crawl.

It was a period where beer snobbery ruled the day and it was not uncommon to hear bar patrons discuss the makeup of the beer the beer they were drinking. This boom period always seemed destined for failure, or at least a retraction as many markets seemed to have more craft breweries than they could support.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

The pandemic, however, hastened that downfall. Many of these local and regional craft breweries counted on in-person sales to drive their business. 

And while many had local and regional distribution, selling through a third party comes with much lower margins. Direct sales drove their business and the pandemic forced many breweries to shut down their taprooms during the period where social distancing rules were in effect.

During those months the breweries still had rent and employees to pay while little money was coming in. That led to a number of popular beermakers including San Francisco's nationally-known Anchor Brewing as well as many regional favorites including Chicago’s Metropolitan Brewing, New Jersey’s Flying Fish, Denver’s Joyride Brewing, Tampa’s Zydeco Brew Werks, and Cleveland’s Terrestrial Brewing filing bankruptcy.

Some of these brands hope to survive, but others, including Anchor Brewing, fell into Chapter 7 liquidation. Now, another domino has fallen as a popular regional brewery has filed for Chapter 11 bankruptcy protection.

Overall beer sales have fallen.

Image source: Shutterstock

Covid is not the only reason for brewery bankruptcies

While covid deserves some of the blame for brewery failures, it's not the only reason why so many have filed for bankruptcy protection. Overall beer sales have fallen driven by younger people embracing non-alcoholic cocktails, and the rise in popularity of non-beer alcoholic offerings,

Beer sales have fallen to their lowest levels since 1999 and some industry analysts

"Sales declined by more than 5% in the first nine months of the year, dragged down not only by the backlash and boycotts against Anheuser-Busch-owned Bud Light but the changing habits of younger drinkers," according to data from Beer Marketer’s Insights published by the New York Post.

Bud Light parent Anheuser Busch InBev (BUD) faced massive boycotts after it partnered with transgender social media influencer Dylan Mulvaney. It was a very small partnership but it led to a right-wing backlash spurred on by Kid Rock, who posted a video on social media where he chastised the company before shooting up cases of Bud Light with an automatic weapon.

Another brewery files Chapter 11 bankruptcy

Gizmo Brew Works, which does business under the name Roth Brewing Company LLC, filed for Chapter 11 bankruptcy protection on March 8. In its filing, the company checked the box that indicates that its debts are less than $7.5 million and it chooses to proceed under Subchapter V of Chapter 11. 

"Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed," USCourts.gov explained. 

Roth Brewing/Gizmo Brew Works shared that it has 50-99 creditors and assets $100,000 and $500,000. The filing noted that the company does expect to have funds available for unsecured creditors. 

The popular brewery operates three taprooms and sells its beer to go at those locations.

"Join us at Gizmo Brew Works Craft Brewery and Taprooms located in Raleigh, Durham, and Chapel Hill, North Carolina. Find us for entertainment, live music, food trucks, beer specials, and most importantly, great-tasting craft beer by Gizmo Brew Works," the company shared on its website.

The company estimates that it has between $1 and $10 million in liabilities (a broad range as the bankruptcy form does not provide a space to be more specific).

Gizmo Brew Works/Roth Brewing did not share a reorganization or funding plan in its bankruptcy filing. An email request for comment sent through the company's contact page was not immediately returned.

 

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Government

Walmart joins Costco in sharing key pricing news

The massive retailers have both shared information that some retailers keep very close to the vest.

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As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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Government

Walmart has really good news for shoppers (and Joe Biden)

The giant retailer joins Costco in making a statement that has political overtones, even if that’s not the intent.

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on

As we head toward a presidential election, the presumed candidates for both parties will look for issues that rally undecided voters. 

The economy will be a key issue, with Democrats pointing to job creation and lowering prices while Republicans will cite the layoffs at Big Tech companies, high housing prices, and of course, sticky inflation.

The covid pandemic created a perfect storm for inflation and higher prices. It became harder to get many items because people getting sick slowed down, or even stopped, production at some factories.

Related: Popular mall retailer shuts down abruptly after bankruptcy filing

It was also a period where demand increased while shipping, trucking and delivery systems were all strained or thrown out of whack. The combination led to product shortages and higher prices.

You might have gone to the grocery store and not been able to buy your favorite paper towel brand or find toilet paper at all. That happened partly because of the supply chain and partly due to increased demand, but at the end of the day, it led to higher prices, which some consumers blamed on President Joe Biden's administration.

Biden, of course, was blamed for the price increases, but as inflation has dropped and grocery prices have fallen, few companies have been up front about it. That's probably not a political choice in most cases. Instead, some companies have chosen to lower prices more slowly than they raised them.

However, two major retailers, Walmart (WMT) and Costco, have been very honest about inflation. Walmart Chief Executive Doug McMillon's most recent comments validate what Biden's administration has been saying about the state of the economy. And they contrast with the economic picture being painted by Republicans who support their presumptive nominee, Donald Trump.

Walmart has seen inflation drop in many key areas.

Image source: Joe Raedle/Getty Images

Walmart sees lower prices

McMillon does not talk about lower prices to make a political statement. He's communicating with customers and potential customers through the analysts who cover the company's quarterly-earnings calls.

During Walmart's fiscal-fourth-quarter-earnings call, McMillon was clear that prices are going down.

"I'm excited about the omnichannel net promoter score trends the team is driving. Across countries, we continue to see a customer that's resilient but looking for value. As always, we're working hard to deliver that for them, including through our rollbacks on food pricing in Walmart U.S. Those were up significantly in Q4 versus last year, following a big increase in Q3," he said.

He was specific about where the chain has seen prices go down.

"Our general merchandise prices are lower than a year ago and even two years ago in some categories, which means our customers are finding value in areas like apparel and hard lines," he said. "In food, prices are lower than a year ago in places like eggs, apples, and deli snacks, but higher in other places like asparagus and blackberries."

McMillon said that in other areas prices were still up but have been falling.

"Dry grocery and consumables categories like paper goods and cleaning supplies are up mid-single digits versus last year and high teens versus two years ago. Private-brand penetration is up in many of the countries where we operate, including the United States," he said.

Costco sees almost no inflation impact

McMillon avoided the word inflation in his comments. Costco  (COST)  Chief Financial Officer Richard Galanti, who steps down on March 15, has been very transparent on the topic.

The CFO commented on inflation during his company's fiscal-first-quarter-earnings call.

"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.

Galanti made clear that inflation (and even deflation) varied by category.

"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.

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