Celsius Network CEO on Custodian Prime contract: 'We have five different providers'

Custodian Prime Trust is reportedly ending its Celsius contract over 'red flags’. Celsius Network CEO Alex Mashinsky joins Yahoo Finance Live to discuss.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. In today's Crypto Corner, talking the push to regulate growing louder in the crypto space. Been heating up. Even the Fed taking a stronger tone, at least when it looks into a couple of things, including stable coins, some talking about the lending platforms themselves and how all these issues could potentially present systemic risks to the traditional financial system.

Of course, many crypto lending platforms operate like banks, but don't call themselves banks. Many don't have banking charters. And recently, one of the largest platforms, Celsius, which has over $16 billion on its platform, been playing defense, defending its lending practices against a report that claimed its custodian backed out of working with the company because of risks being taken by the firm. Celsius has been very defensive about that.

And for more on it, I want to bring back on to the show the CEO of Celsius. Alex Mashinsky joins us once again. And Alex, appreciate you coming on here to set the record straight. You know, you and I have talked many times before. I love kind of how you just walk through everything in a transparent way. So why don't we just address this one first? You know, when we talk about your custodian Prime Trust in this report from CoinDesk saying that it was around how you guys kind of lend out the assets here, the collateral that's posted there. What's really going on? Set the record straight for us.

ALEX MASHINSKY: Sure, yeah. Hi, Zack. Good to see you again. And we've made a public statement. It's a shame that CoinDesk did not publish our statement or their affiliation with one of our competitors. But the fact of the matter is that we only use Prime Trust in one or two states in the United States. We have five different providers. And, you know, when you change your cable company, not-- I don't know if it deserves an article in the newspaper, but that's what CoinDesk elected to do.

So we actually publicly stated that we did not rehypothecate any assets in New York state. And again, it's unfortunate that-- but Prime Trust knows that. CoinDesk knows that. It's a shame that both of them elected not to talk about that. Recently, the markets-- the crypto markets have gone through a 53% drawdown. And Celsius was the only company that came out of that, not just with record profits and record revenues, but also stating that we had zero liquidation, institutional liquidations, both to people that we issued loans to, as well as loans that Celsius has taken.

So I don't think there's a bank in the world-- there's no bank in the world that can take a 53% drawdown and keep walking because of the leverage they have. At Celsius, we always have more assets than loans outstanding. And rehypothecation or lending is our business. But we, unlike bank and unlike large financial institutions who live on leverage, we don't have any leverage in the system. We're not allowed to create leverage through fractional reserves.

ZACK GUZMAN: Yeah, that's the interesting thing, too, right? Because, like, fractional reserve banking and rehypothecation are terms-- maybe our viewers are familiar with the former, maybe not the latter. But we talk about some of the risks in that space. I think why people get afraid of rehypothecation is because, you know, you're taking collateral out. We saw that in kind of the subprime mortgage crisis when you got banks using collateral mortgages, in that case, kind of lending them out. And the cycle goes on and on.

And it builds on itself, and there's problems there, which is why I think, you know, maybe that's why when this report came out, people were a little nervous. And your terms of service do highlight that you guys do hypothecate and rehypothecate. At least, you know, that's included in terms of what your users should be prepared for potentially when they sign up for the service.

But I guess, it speaks to the larger questions around crypto lending platforms and the transparency there, whether or not there might be similar risks if you are lending out collateral, what that might look like. I mean, how do you kind of calculate and assure customers that things are safe, if it's maybe not regulated the same way that banks are?

ALEX MASHINSKY: Well, so, again, banks are allowed to create up to 50 to 1 leverage. So for every dollar that they have, some of the largest banks in the world issue $50 worth of loans. Celsius, like I said, is always less than $1 worth of loans for every dollar that we have in deposits because we are not a bank.

So all this discussion that we're talking about is in the context of Celsius having less than 1 to 1 ratio, while banks, who are the people who are basically funding here or creating fear, uncertainty, and doubt, are the ones who leverage 20, 30, 40 times to 1 and now the ones we have to bail out every 10 or 15 years. Like I said, both in March 2020, when we went through a 46% drawdown, and recently in May of 2021, we went through a 53% drawdown, Celsius had zero liquidations, right? Zero bailout, zero issues with any counterparty.

So the system, the DeFi system, the decentralized finance world is proving itself to work very, very well without the need for regulators or others to intervene or bail us out. And the problem is not on the DeFi side. The problem is in centralized finance, where excessive leverage, excessive rehypothecation, all the stuff that you're talking about, it really exists.

Because if you ask yourself, what is the leverage of Goldman Sachs and Morgan Stanley or CD or any of the large bank-- Deutsche Bank, I think, has leveraged 50 to-- $50 for every dollar in loans, for every dollar in assets that they actually hold. So that is where the problem is. And the new world of decentralized finance is here to solve that problem, without the Fed or other institutions having to create a blanket or a safety blanket under our financial system.

AKIKO FUJITA: Alex, having said that, we have heard from a number of central bankers weighing in on concerns they have around stable coins. Most recently, we had Boston Fed President Eric Rosengren listing Tether, singling out Tether, as concerns around financial stability challenges. He said it looks like a portfolio of a prime money market fund, maybe riskier. What do you make of those comments?

ALEX MASHINSKY: Well, it's true. And it's true that Vanguard also have money market fund that has hundreds of billions of dollars that is mostly backed by the same type of assets-- commercial paper and other type of assets. So what Tether is doing-- again, I'm not the representative of Tether, but Celsius allows users to earn yield on Tether. And Tether, just like other funds, is backed by the same profile of assets. So I don't see any difference. And Tether, again, is, I think, $60 billion, compared to trillions of dollars of commercial paper and other type of assets that are circulating through the financial system.

So it's not just Tether, right? It's Circle. It's USDC. There's a lot of other assets that effectively have the same type of profile and. I think you're going to have new assets like CBDCs, right, the Central Bank digital currencies, which are not backed by anything. The Chinese Yuan or the other type of CBDCs, are not backed by anything. At least here, it's backed one to one. So you tell me which one is more risky and which one is more reliable.

AKIKO FUJITA: Alex Mashinsky, Celsius Network CEO, it's good to talk to you today. Appreciate your time.