{"id":20834,"date":"2020-05-25T16:53:38","date_gmt":"2020-05-25T23:53:38","guid":{"rendered":"https:\/\/coincentral.com\/?p=20834"},"modified":"2023-10-01T14:58:33","modified_gmt":"2023-10-01T18:58:33","slug":"crypto-interest-account-pioneer-alex-mashinsky-and-takes-on-big-finance","status":"publish","type":"post","link":"https:\/\/coincentral.com\/crypto-interest-account-pioneer-alex-mashinsky-and-takes-on-big-finance\/","title":{"rendered":"Celsius Network CEO Alex Mashinsky: Interview 202"},"content":{"rendered":"

Celsius was considered a <\/span>top cryptocurrency interest account before suspending all customer withdrawals and filing for bankruptcy, owing its users $4.7 billion. Mashinsky stepped down from his role as CEO in late September. Prior to freezing withdrawals, Mashinsky withdrew $10M in tokens along with his wife Kristine Mashinsky and former chief strategy officer Daniel Leon withdrawing over $2m and roughly $7m, respectively.\u00a0 Mashinsky was arrested and charged with seven counts of fraud<\/a>\u00a0by the US Department of Justice in July 2023.\u00a0<\/span><\/p>\n

This interview was conducted and published in May 2020. Celsius would grow to 300,000 active users (over $100 in wallets) and more than 1.7 million registered users, prior to shutting down in 2022<\/a>.<\/p>\n

\n

\u201cCelsius is going after all the money in the world,\u201d says Alex Mashinsky, the Founder of Celsius, who plans to make more than just a dent.<\/b><\/p>\n

Investment banks are thriving despite bustling fintech startup activity and looming economic threats\u2013JP Morgan celebrated its most profitable year ever in 2019 with a record <\/span>$36.4 billion in net income<\/span><\/a>, a bulk of which came from a very important strategy called Security (Sec) Lending\u2013 we\u2019ll get into that soon enough.<\/span><\/p>\n

Alex has made around 120 VC investments, holds 34 patents, raised over a billion dollars, and has achieved over $3 billion in exits.\u00a0 <\/span>Alex is on his eighth startup company as a founder, and two of his companies, Arbinet and Transit Wireless are two of New York\u2019s biggest venture-backed exits ever, with exits of $750M and $1.2B respectively.\u00a0 The core similarity between these exits is that the companies built a monopolistic hold in their industries and utilized groundbreaking technology to pioneer business models assumed to be impossible.\u00a0<\/span><\/p>\n

At face value, the concept is easy to understand: Users deposit any amount of a variety of digital assets and earn an annual interest rate upwards of 11%\u2013 a stark comparison to traditional bank savings accounts, which offer anywhere between .01% to 2%.\u00a0<\/span><\/p>\n

\u201c<\/span><\/i>What most people are missing is what the banks are telling their investors how they earn 15-18% on their depositors’ money every quarter,\u201d Alex starts. \u201cIf they cared about their customers, the banks could also be paying 9% as we do. They\u2019re focused on <\/span>returning profits to shareholders<\/span><\/a>, not interest to depositors, the two directly conflict.\u00a0<\/span>CoinCentral\u2019s Steven Buchko first <\/span>interviewed Alex back in 2018<\/span><\/a>, when Celsius was in the middle of launching its <\/span>app<\/span><\/p>\n

\n

Challenging the Status Queue with Blockchain: Investment Bank Edition<\/span><\/h2>\n

Rarely does one visit appealing financial opportunities without a healthy dose of incredulity or skepticism. The expression <\/span>If it\u2019s too good to be true, it probably is\u2026 <\/span><\/i>is built on multi-generation experiences of disappointments, trickery, and usually a guy with a bleached smile, an expensive suit, and a $100 haircut.<\/span><\/p>\n

However, <\/span>too good to be true<\/span><\/i> may carry less weight in a paradigm that is already significantly skewed against your best interests. At least, that\u2019s what the Celsius ethos argues.\u00a0<\/span><\/p>\n

\u201cBack when I made VoIP in the \u201890s, we were able to offer the service for a fifth of the price,\u201d says Mashinsky. \u201cPeople said it was impossible to offer cheaper services than AT&T. Today, people assume that just because a bank pays them 1% in interest, no one can beat the bank.\u201d\u00a0<\/span><\/p>\n

“But, Mr. Mashinsky, how does the bank even pay people 1%?” a curious reader may ask.<\/em><\/span><\/p>\n

When we think of big banks, we usually think of gigantic buildings sitting on the most expensive streets of downtown and highly paid executives. Banks just know how to make money, even in their darker days. In the 2008 aftermath, <\/span>$1.6 billion of the federal bank bailout money<\/span><\/a> went to executives. Lloyd Blankfein, the then-president and chief executive officer of Goldman Sachs, left with $54 million in compensation that year, and the top five executives received $242 million. The house never loses.\u00a0\u00a0<\/span><\/p>\n

To understand how banks make their money, Mashinsky implores us to study up on something few Americans outside of the finance world are aware of called <\/span>securities lending<\/span>.\u00a0<\/span><\/p>\n

Securities lending, or sec lending, is the practice of \u201cloaning\u201d a stock, security, or derivative to an investor or firm.<\/strong> It\u2019s generally done between brokers and dealers and not individual investors. As a critical component of creating market liquidity (specifically for re-hypothecation, or basically the process to facilitate shorts and other options trading), sec lending can be incredibly lucrative.\u00a0<\/span><\/p>\n

Mashinsky walks us through a simple example.<\/span><\/p>\n

\u201cLet\u2019s say you buy a TSLA stock from Charles Schwab. You take on the risk of TSLA going up or down, but on the back-end, Charles Schwab is loaning your TSLA to other brokers and dealers and making something between 12% to 17% per year.<\/strong>\u201d\u00a0<\/span><\/p>\n

How much do you, the investor, and owner of TSLA make on Schwab\u2019s interest revenue? A big fat zero.\u00a0<\/span><\/p>\n

Similarly, most bank savings accounts have historically offered depositors a sliver of a percentage (now upwards of 2%) on their assets, but are loaning depositor out to receive hearty returns. JP Morgan, a financial behemoth entrenched in American history, banks for over 100 million Americans who have Chase cards, bank accounts, and other accounts.\u00a0\u00a0<\/span><\/p>\n

\u201cJP Morgan\u2019s cost of capital is less than 1%,\u201d says Mashinsky. \u201cTheir return is close to 17%. That\u2019s how they make $36B a year, which they mostly use to buy back their stocks, pay dividends to shareholders, and compensate executives. How is that a good deal for the depositor? What does the depositor get out of this? They take the money you give them for free and lend it back to you and charge you 24% on your credit card.\u201d\u00a0<\/span><\/p>\n

Mashinsky brings us to the punchline, of which he has many.\u00a0<\/span><\/p>\n

\u201cIf a bank has 10:1 leverage on your money, if you withdraw your money, they lose 10x.<\/span> The only one who has the power to let the bank do what it does is you. You just don\u2019t know you don\u2019t have the power.\u201d<\/b><\/p>\n

Celsius is looking to flip the script.<\/span><\/p>\n

\"Celsius
Celsius crypto interest account interest rates on stablecoin<\/a> deposits.<\/figcaption><\/figure>\n

\u201cShow me a fintech company that puts a scratch on any bank<\/span>,\u201d says Mashinsky. \u201c<\/span>JP Morgan just had their best year. No fintech company has been able to unseat or dethrone these institutions. They just get stronger and institute it. <\/span>Institutions can\u2019t win in my game. <\/b>We took the juiciest part of Wall Street and brought it to the crypto community. People hate me for spilling the beans. Give the bulk of the fees to the depositors. We give 80% of revenue to the depositors.\u201d\u00a0<\/span><\/p>\n

Celsius: Blockchain Verified Interest and Cryptocurrency Interest Accounts<\/span><\/h2>\n

Historically, monopolies build a fortress around their business interests by the high barriers to entry created by existing infrastructure they\u2019ve built or purchased.\u00a0<\/span>However, advances in technology can often antiquate the existing infrastructure, as we\u2019ve seen the impact of automobiles and planes on the railroad industry.<\/span><\/p>\n

Mashinsky wants to use blockchain as the impetus to topple Wall Street\u2019s dominance and bring financial empowerment to the people.\u00a0<\/strong><\/p>\n

\u201cLet\u2019s start with the bank,\u201d leads Mashinsky. \u201cImagine a public audit function. You make a deposit in a bank and ask where your money is going, where it\u2019s stored, who they\u2019re lending it to, how much the bank is charging them, how much of that money is coming back to you, and how they plan on distributing it back to you.\u201d\u00a0<\/span><\/p>\n

\u201cIf you\u2019re not a high net worth individual, any bank would kick you out and shut down your account for having the audacity to ask these questions,\u201d Mashinsky half-jokes. \u201cThey assume the marble pillars outside every bank speak for themselves: they know how to make money. They don\u2019t have to prove anything.\u201d<\/span><\/p>\n

\u201cNot only that, but the accumulating re-flating activities the government is doing is also going to get us in trouble. We have over $100T in deficits and $120T in liabilities. If banks fail and get bought out or bailed out, it\u2019s only prolonging it. <\/span>You can rearrange the seats in the titanic at any time, but the ship is still sinking. This ship is going down no matter what, the question is how much water is it taking on.<\/b>\u201d\u00a0<\/span><\/p>\n

Celsius cuts out banks and governments by using blockchain to give all parties visibility into its business workings. It had to start with re-inventing the interest-bearing account from scratch.<\/strong><\/span><\/p>\n

\u201cThe reason Celsius focuses on transparency and using the ledger is its amazing mechanism to deliver the interest. I can’t use a credit card to deliver the fees to you because their fees are too high. Bitfnix recently moved almost $1B for $6 using blockchain. That\u2019s not possible with any other infrastructure\u201d<\/span><\/p>\n

\u201cWe use blockchain as an interest-delivering vehicle on the front-end, and we\u2019re using transparency and open ledgers on the back end. <\/span>Celsians.com<\/span><\/a>, for example, is a third-party site that uses blockchain data to audit Celsius. They take all of the wallets we publish since transactions are public, you can verify everything we\u2019re saying. Who they\u2019re giving these loans to? Payments coming in. We can see the interest, who\u2019s paying the interest, and who is Celsius paying this interest to. We publish all wallets on the website, you don\u2019t have to be a member of Celsius, you can verify it just by knowing the blockchain works.\u201d<\/span><\/p>\n

\"An
Celsisu\u2019s crypto interest account rates, courtesy of Celsians.com<\/figcaption><\/figure>\n

Mashinsky sees Celsius as the future of the financial institutions, even if only as a foundation.\u00a0<\/span><\/p>\n

\u201cWe hope we set the skeleton of the foundation of the future institution. This isn\u2019t about Celsius, it\u2019s about creating a whole new infrastructure to replace Wall Street.\u201d<\/span><\/p>\n

\u201cCelsius has shared how much we charge customers, how much we earn, how much we payout for the past 114 weeks since our launch,\u201d Mashinsky says proudly. \u201c We are probably the most transparent company in cryptocurrency. Our community routinely runs audits on our <\/span>numbers via the blockchain<\/span><\/a> as well.\u201d<\/span><\/p>\n

Leading the Crypto Interest Account Market\u00a0<\/span><\/h2>\n

With more earnings in BTC and ETH than all of its competition within the cryptocurrency space combined, Celsius has earned a significant stride.\u00a0<\/span><\/p>\n

Mashinsky credits Celsius\u2019s market leadership with community effort and operational execution. Mashinsky, who served in the Israeli military for three years, isn\u2019t one to shy away from going for the jugular.\u00a0<\/span><\/p>\n

\"An
An example of crypto interest account rates on Celsius.<\/figcaption><\/figure>\n

\u201cCelsius did more than anyone else because our competitors just don’t pay users enough. Celsius distributes 80% of its revenues to its community, whereas our competitors just published <\/span>30% of NET profits<\/span><\/a> which is much less.\u201d<\/span><\/p>\n

\u201cNone of these companies will show you how they earn the interest or share any details about their business,\u201d says Mashinsky. \u201cMany of them won\u2019t even give you a physical address of where their offices are. I would not trust such companies.\u201d\u00a0<\/span><\/p>\n

\"crypto
A comparison of crypto interest account rates and fiat interest rates (Source: Celsius)<\/figcaption><\/figure>\n

\u201cMany of them are simply just trying to compete with us directly. They aren\u2019t earning the rate, they\u2019re subsidizing payouts with VC money they raised from Wall-street type guys,\u201d Mashinsky points to competitors <\/span>BlockFi<\/span><\/a> and Cred. Celsius is a community effort looking to provide as much effort to the community as possible.\u201d\u00a0<\/span><\/p>\n

If you\u2019re planning to beat Celsius, Mashinsky claims, you\u2019d better be prepared to cut your profit margins.<\/span><\/p>\n

\u201c<\/span>If you want to offer higher rates than Celsius, you\u2019d better give more than 80% of what you make to the community. We want to set the bar really high.\u201d<\/span><\/p>\n

2020, Growth, and Onwards<\/span><\/h2>\n

The interest-bearing cryptocurrency account niche is a comparative gnat when standing next to the traditional interest-bearing market. To Mashinsky, this only means room for growth.\u00a0<\/span><\/p>\n

\u201cCelsius is going after all the money in the world. 7.5B people want to earn more interest,<\/b> yet banks and governments keep lowering rates and are giving all the money to the corporations and to the \u201ctoo big to fail\u201d banks,\u201d Mashinsky says, preparing a heated tangent to the current economic situation.\u00a0<\/span><\/p>\n

\u201cAll the money we\u2019re printing now should be going to the infrastructure of this country,\u201d Mashinsky begins. \u201cGetting everything done locally requires tens of trillions of dollars. Instead of spending it on infrastructure, we\u2019re giving it to airlines, hotels, and cruise companies. We\u2019re Reflating everybody, zombie companies, the fed will bail out anybody, exactly what japan did for the last 30 years. That\u2019s what my beef is. Taking precious dollars from the future\u2013 borrowing it from our kids, making them pay taxes on it in the future, and spending it to maintain our lifestyles today.\u201d<\/span><\/p>\n

\u201cIf you deliver reliable interest income, seven billion people will want to use your service,\u201d <\/b>Mashinsky writes. \u201cThat has been our plan from the beginning\u2013 delivering interest income to as many people as possible, and in the process, creating mass adoption for all the coins we support.\u201d<\/span><\/p>\n

One of the tokens <\/span>Celsius<\/span> will inevitably bring attention to is its own. CEL can be used to effectively increase interest rates on savings accounts and decrease interest rates on loans.\u00a0<\/span><\/p>\n

\u201cCEL\u2019s main function is to offer up to 30% more interest and provide 5% income if you HODL it,\u201d but we have <\/span>other utilities<\/span><\/a>.\u201d<\/span><\/p>\n