Custodian Prime Trust Cuts Ties With Crypto Lender Celsius

A source familiar with the situation said Prime Trust’s risk team was concerned about Celsius’ strategy of “endlessly re-hypothecating assets.”

Jun 24, 2021 at 7:38 p.m. UTC
Updated Sep 14, 2021 at 1:16 p.m. UTC

Custodian Prime Trust has given cryptocurrency lending platform Celsius Network 30 days to get off its platform, citing “red flags,” people familiar with the matter said. 

Prime Trust confirmed it has terminated the contract with Celsius and after the notice period will turn off API (application interface programming) access to its custodial platform, but would not specify the reason. 

“We've terminated our partnership with Celsius Network for a variety of business factors. The relationship lasted just over 12 months. We won’t comment beyond that other than to wish Celsius well in its endeavors,” Prime Trust said in a statement.

Celsius operates similarly to a bank in that it takes deposits of cryptocurrencies from one set of customers and lends crypto and dollars to another. The borrowers pledge other crypto assets as collateral. Since March 2020, the lender has been using Nevada-based Prime Trust to store assets for some of its customers.  

A person familiar with the situation, who did not want to be identified because of the sensitivity of the matter, said Prime Trust’s risk team was concerned about Celsius’ strategy of “endlessly re-hypothecating assets.”

Rehypothecation is a practice whereby banks and brokers use, for their own purposes, assets that have been posted as collateral by their clients. The re-use of collateral from one lending transaction to finance additional loans creates a somewhat obscure and potentially dangerous type of financial derivative if abused.

It’s not the first time such allegations have been made about Celsius’ practices.

Celsius responds

A Celsius spokesperson strenuously denied the re-hypothecation claims.

“Since Celsius started offering its services to NY residents, it has never rehypothecated their crypto assets,” the spokesperson said via email. “Unfortunately, the level of service provided to our NY users through our partnership with Prime Trust was not at the level Celsius users are accustomed to, and therefore we are planning to proceed with an alternative solution for our New York state users.”

In its terms of service, Celsius states that it “may lend, sell, pledge, hypothecate, assign, invest, use, commingle or otherwise dispose of assets and Eligible Digital Assets to counterparties or hold the Eligible Digital Assets with counterparties, and we will use our best commercial and operational efforts to prevent losses.”

The terms of service also indicate Prime Trust holds assets for Celsius customers in Texas and Washington state, not just New York. The Celsius spokesperson did not respond to requests for clarification.

Still using Fireblocks

Celsius’ other “core” custody provider is Fireblocks, the lender said when it announced the Prime Trust partnership last year. 

The lender has used Fireblocks’ services since 2019, according to an October 2020 case study on the custodian’s website. 

“Both Prime Trust and Celsius are Fireblocks customers,” Fireblocks’ CEO Michael Shaulov said through a spokesperson Thursday. “As a non-custodial technology provider, we don’t dictate or intervene in our customers’ businesses.”

Separately, Celsius announced Wednesday it was moving its operations out of the U.K., citing regulatory uncertainty, and is looking to move to the U.S.

Marc Hochstein contributed reporting.

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