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Explainer | Turmoil in global market for blockchain-based DeFi products leaves investors holding the bag
- Decentralised finance platforms, which run on blockchain technology, remain unregulated in Hong Kong
- The case of beleaguered cryptocurrency lender Celsius Network highlights the risks involved in high-yield DeFi products
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Hong Kong investors caught in the decentralised finance (DeFi) industry’s US$247 billion global rout can expect little to no chance of getting any remedy, as a growing number of cryptocurrency lending platforms, hedge funds and stablecoin issuers are now mired in financial distress.
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Cryptocurrency lender Celsius Network has become the latest major DeFi player hit by the crash in prices of digital tokens like bitcoin. The New Jersey-based company has suspended all withdrawals and transfers by clients since June 13 because of “extreme market conditions”.
The current troubles of Celsius reflect how the DeFi industry operates. It “shuns centralised authorities, is largely unregulated and operates across borders”, according to a Fitch Ratings primer on this sector.
Being inclusive and unregulated means that DeFi products can be accessed by any person with an internet connection and a compatible electronic wallet.
Celsius founder, chairman and chief executive Alex Mashinsky has said the platform, which has more than two million users, returns as much as 80 per cent of its earnings from lending cryptocurrency funds pooled from retail lenders to institutional borrowers, such as hedge funds.
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Users can earn as much as 18 per cent annual percentage yield. Celsius claims to have processed US$8.2 billion in loans and US$11.8 billion in assets.
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