CDPQ Invests in Cryptocurrency Lender Celsius Network
The Caisse de dépôt et placement du Québec (CDPQ) has just participated in a US$400-million investment in Celsius Network, a cryptocurrency interest and lending platform in the crosshairs of U.S. market authorities.
The investment led by WestCap, the growth capital firm of former Airbnb CFO Laurence Tosi, in partnership with the Caisse, establishes a total value of US $3 billion to the company founded in 2017.
"Blockchain technology has disruptive potential for many sectors of the traditional economy," said Caisse chief technology officer Alexandre Synnett, in a statement. "As the adoption rate of digital assets increases, we intend to seize the right investment opportunities, while working with our partners to regulate the industry."
The deal comes a month after Celsius found itself in the crosshairs of market regulators in Texas and New Jersey. They allege that the interest payment in the form of Celsius' issued cryptocurrency -- CEL -- constitutes an unregistered security offering.
The company disputes this interpretation.
Celsius Network specializes in deposits and loans of cryptocurrencies, such as Bitcoin or Ethereum. More than 1 million customers are registered on its platform, according to the company, which says it has total assets of US $25 billion.
Part of its business model relies on its cryptocurrency account offered to individuals, but it also offers to borrow using cryptocurrencies as collateral assets.
The company lends deposited cryptocurrencies to institutional investors. It claims that 80 per cent of the proceeds from these exchanges are returned to depositors in the form of interest.
The remaining 20 per cent is used to fund its development. Over the past three years, it claims that the value of interest paid is equivalent to US $850 million.
Accounts paying interest on cryptocurrency deposits have gained popularity among crypto enthusiasts amidst historically low interest rates on bonds and traditional banking products. Interest rates on some of Celsius Network's products can be as high as 17 per cent.
The US $400-million investment by the Caisse and its partner will allow Celsius to hire new employees and develop new products.
CEO Alex Mashinsky believes that the investment will first and foremost reassure regulators and strengthen the credibility of his service.
"It's not the US $400 million," he told a Financial Times reporter. "It's the credibility that comes with the people who sign the cheque."
Both the Caisse and WestCap have expressed confidence in the company and assured that the crypto lender is working with regulators.
"Celsius is the world's leading cryptocurrency lender and has a strong management team that puts transparency and customer protection at the heart of its business," said Synnett.
CDPQ put out this press release on this deal:
Celsius helps hundreds of thousands of consumers worldwide to find the path towards financial independence through a compounding yield service and instant low-cost loans accessible via a web and mobile app. Built on the belief that financial services should only do what is in the best interest of the customers and community, Celsius is a blockchain-based fee-free platform where membership provides access to curated financial services that are not available through traditional financial institutions. For additional information please visit www.celsius.network.
ABOUT WESTCAP GROUP
The WestCap Group is a growth equity firm founded by Laurence A. Tosi, who, together with the WestCap team, has founded, capitalized, and operated tech-enabled, asset-light marketplaces for over 20 years. With over $5 billion of assets under management and committed capital, WestCap has made notable investments in technology businesses such as Airbnb, StubHub, Klarna, iPreo, Skillz, Sonder, Addepar, Hopper, iCapital and Bolt. For more information about WestCap, visit www.WestCap.com.
“Blockchain technology has the potential to disrupt several sectors of the traditional economy. As digital assets grow in adoption, we intend to capture the right opportunities, while working with our partners towards a regulated industry,” said Alexandre Synnett, Executive Vice-President and Chief Technology Officer at CDPQ. “Celsius is the world’s leading crypto lender with a strong management team that puts transparency and customer protection at the core of their operations. CDPQ and WestCap are eager to partner with them to share our expertise in the FinTech sector as they continue to expand their services.”
While the primary use of this technology has hitherto been in the creation of virtual currencies, such as bitcoin, blockchain technology offers broader opportunities, including any transactions requiring authentication. Such opportunities appear in public administration and supply chains, particularly those involving valuable and forging- sensitive products (pharmaceuticals, luxury products). Zhao et al. (2016) speak of three generations of blockchains, where blockchain 1.0 refers to digital currency, Blockchain 2.0 to digital finance, and Blockchain 3.0 to digital society.
The original application of blockchain technology is in cryptocurrencies. The best known type, though not the only one, is bitcoin. It was introduced in 2009, trading initially for pennies, to reach 1 USD by early 2011, jumped to 30 USD in mid-2011, going down to around 8 USD in the second half of 2011 and rising sharply to 290 USD in 2015 (Luther, 2016a) and in the range of 800-1070 USD in the first month of 2017 (Coinbase, Inc., 2017). Luther (2016a) argues that the future of blockchain technology in digital payments is bright. On the one hand, we can observe a rise in the share of electronic transactions, and on the other hand, blockchain technology is less costly. However, while he argues that blockchain technology will be used by more and more players from the financial industry, bitcoin and other cryptocurrencies will remain “niche monies”. The only possibility to replace the existing currencies exists, according to Luther (2016a), in countries with very weak and poorly managed currencies. In other cases, network effects exist, in the sense that the value of using a particular currency depends on the number of other users who are ready to transact in that currency (Luther, 2016b). Cryptocurrencies may have, however, other uses which do not necessarily require their widespread adoption. A recent trend among companies involved in blockchain development is to use Initial Coin Offerings (Miles, 2017), which serve these companies to acquire capital. On the negative side, one needs to note that virtual currencies might become speculative investments, especially that their value is not supported by any government or central bank (Comment on SR-BatsBZX-2016-30, 2017). In fact cryptocurrencies’ price rally throughout the first months of 2017 and their subsequent drop in value confirm earlier warnings in this respect.
Irrespective of the uncertain future of cryptocurrencies, applications of blockchain technology in the developed markets are abundant. Cases of financial institutions working towards the application of blockchain technology in payments include 10 major world stock exchanges, among which are the London Stock Exchange, CME, Deutsche Borse, NYSE and Nasdaq (Rizzo, 2016). In October 2015, Nasdaq introduced Linq, “a solution enabling private companies to digitally represent share ownership using blockchain- based technology” (Nasdaq, 2016). Linq is just a starting point as Nasdaq already has indicated new applications of distributed ledger technology in improving proxy voting, company registration and public pension registration. Interestingly, Nasdaq wants to apply these technologies in Estonia, where it owns the Tallinn Stock Exchange, because Estonia, due to its small size, is a good location for this type of experiment. This is in line with arguments concerning the experimentation component of business model innovation (Sosna et al., 2010; Doz & Kosonen, 2010). Financial and public services industries make up a specific setting for radical innovations, such as blockchain, due to their vulnerability to possible failures. Therefore the identification of the right setting for experimentation should be quite important for its implementation.
While in the case of cryptocurrencies blockchain’s key contribution is in terms of building systemic trust in transaction security, trust might not be an issue when the technology is used by large players, such as leading exchange markets which have developed their own instruments for ensuring trust, e.g. clearing houses. It remains an issue, however, in other types of transactions. Zhu and Zhou (2016) indicate that crowd-funded companies are such an example. They lack the support of a centralised, trustworthy clearing and settling house. For this reason, on the one hand, they could benefit from mechanisms that would increase trust in the crowd-funding transactions, and on the other hand from mechanisms that would increase their efficiency. The issue of trust is related to the registration of shares, the management of funds collected by crowd-sourcing, and facilitating a mechanism of corporate governance that would enable small, distributed shareholders to exercise control over a funded company (Zhu & Zhou, 2016)
Blockchain technologies in most of these areas could additionally improve the efficiency of operations and facilitate compliance with regulations. One of the areas where blockchain is already offering benefits are cross-border payments. Recently, Ripple developed an application to provide interbank payments using blockchain technology, involving several important banks, such as Santander, UBS, UniCredit, ReiseBank, CIBC, National Bank of Abu Dhabi (NBAD), and ATB Financial, and working with some 90 more banks to introduce this solution. The technology will basically replace the current system of SWIFT and correspondent banking by real time payments between the involved parties (Holotiuk, Pisani, & Moorman, 2017). In October 2016, the first trial involved Ripple and R3, a financial innovation consortium backed by some leading banks, when a cross-border payment using Ripple’s XRP digital cur- rency was carried out (Roberts, 2016). The progress is fast, as reflected by recent news on making cross-border payments using blockchain technology operational by National Bank of Abu Dhabi on 1st February 2017 (Reuters, 2017). Trials have also been underway using blockchain technology in international securities clearance (Fujitsu, 2016).
Another important way in which blockchain can affect business is via the implementation of so called smart contracts, which are programmable contracts that could enforce themselves upon the occurrence of predefined conditions (Capgemini Consulting, 2016). According to Capgemini’s report (2016) the potential of these contracts can be particularly high in those fields of financial activity that lag behind in terms of processes, speed of settlement, risk of fraud, back-office costs or operational risks. Therefore, their benefits could be the highest for syndicated loans (where processes are not automated and settlement is very slow), insurance, which is often subject to fraud, or the aforementioned equity markets and payment systems. Unquestionably, smart contracts also face challenges, particularly in legal area, such as the issue of contract immutability, secrecy and enforceability by the judicial system (Capgemini Consulting, 2016).
Applications of blockchain technology extend far beyond financial services. Blockchain technology can be used in sharing services such as computing, offered for example by MIT’s Enigma, or the direct renting of apartments, office space or wi-fi routers, as declared by the German startup Slock.it (Sun et al., 2016). Other sharing economy applications include car- pooling, where platforms such as Lazooz and Arcade City are operating, decentralised trading platforms, exemplified by OpenBazaar or distributed social networks like Akasha (De Filippi, 2017). Blockchain thus eliminates the need for intermediaries providing tools for a secure contact between the provider and the user of services. The range of industries and activities where this solution could be operational is huge, including the music industry (Tapscott & Kirkland, 2016). Another opportunity related to the cost efficiency effects of blockchain involves decreasing the scale of transactions in which large retailers are involved. As Gupta (2017) suggests, large retailers might be inclined to increase their supplier networks and source from much smaller ones, if the costs of carrying additional products go down.
Blockchain technology is not a stand-alone technology, but rather works alongside other modern technologies, such as smart contracts or encrypted chips through which smart tagging can be used to authenticate luxury products (Vermes, 2017), including arts (Lopez, 2016), as well as food and medicine. The reasons for this authentication may vary from safety concerns in the case of pharmaceuticals or food to social responsibility in the case of sourcing diamonds (Rogers, 2017). While in some cases authentication may seem redundant, when goods are purchased from trusted parties, for example high- street boutiques, in other cases, such as making purchases from less trusted parties, this technology could make a huge difference. Authentication may also facilitate the trade in these products, even if in some cases for the sake of tradition or the social factor customers will continue to purchase from trusted parties.
While authentication offers huge benefits, it also has certain limitations. As Kaminska (2016) explains, using a tuna supply chain as an example, the key challenge may lie in developing means and rules for authentication so that certain products fulfill predefined conditions, and blockchain technology is not going to substitute these authentication processes. What it can do, however, is to decrease the probability that frauds occur between the production point, where authentication occurs, and the final consumer.
Interestingly, blockchain technology may not only provide disruption in well-established business models, but it can offer solutions to industries with structural problems. One example of this is real estate where illiquidity proves a structural bottleneck in the smooth operation of the market. Illiquidity is one of the consequences of two major factors: lack of trust and long closing time. The current business model of real estate broker firms involves a number of players with different roles in the deal process: lawyers, banks, insurers, regulators, tax agencies, inspectors etc. Each of these has their own records and verification systems to ensure the validity of transactions from all aspects. Due to the large number of players involved, the transparency of the process is compromised, discouraging casual buyers or sellers who are not fully familiar with what they can expect. All the more, in time sensitive cases, the high number of players along with the substantial administrative burden involved slow down the process to an extent that raises viability issues. The decentralised ledger at the heart of the blockchain system cuts the costs of record keeping and verification, hence the increased transparency and shorter closing time of the deal process. Protagonists of blockchain also add another element to their argumentation: through tokenisation, the ownership of properties can be more accessible and liquid to a wide range of potential customers (King, 2017).
Another industry where blockchain may bring a long-awaited solution to pressing structural problems is the music and media industry. Forgery and the spread of fake news hurt the industry and limit its growth potential while the rights holders of content are poised to find a sustainable business model for monetising their creative talent. Blockchain offers the prospect of bypassing content aggregators and platform providers, hence resulting in direct and efficient delivery of products (Deloitte, 2017). Not only will the new process validate the originality of the content, but a new business model of commercialisation will emerge as an opportunity. Confirmed subscribers of the envisioned blockchain community would be more willing to pay for content with the pleasing knowledge of their fees being channelled to the rightful owners. All the more, fee payment may be more customised and economical as micro-transactions will be the basis of the new business model: each consumer will pay content owners directly for individual product items (e.g. songs or news articles) and they will no longer be forced to purchase bundles including content they do not need. As for the supply side of the industry, marketers will also achieve greater efficiency through more concentrated access to the subscriber community (Parker, 2017).
CEO Alex Mashinsky believes that the investment will first and foremost reassure regulators and strengthen the credibility of his service.
"It's not the US $400 million," he told a Financial Times reporter. "It's the credibility that comes with the people who sign the cheque."He's right about that, it's not the US $400 million per se that makes the difference, it's the credibility that comes with the people who sign the cheque.
Accounts paying interest on cryptocurrency deposits have gained popularity among crypto enthusiasts amidst historically low interest rates on bonds and traditional banking products. Interest rates on some of Celsius Network's products can be as high as 17 per cent.Who wouldn't want to take some risk and earn 17% interest in this ultra-low rate environment?