Accredited investor laws are the bane of many in the crypto industry, who see them as preventing small investors from accessing big opportunities. When Celsius was recently forced to cut off access to U.S. citizens who were not accredited investors, many cried foul.Did it help some users avoid the current crisis? Or do accredited investor laws go too far in saving users from themselves — and from profits, too?Two weeks ago, as speculation about Celsius’ solvency began to mount, users started experiencing trouble withdrawing money from their accounts. Though Celsius CEO and founder Alex Mashinsky appeared to initially write the issues off as baseless rumors, the company soon announced a “temporary halt” on withdrawals. Users were — and, as of the time of writing, remain — unable to access their funds, which are, at least in theory, still earning interest.Magazine had interviewed Mashinsky about investor accreditation on May 25 before Celsius ran into serious problems in the public area. The resulting drama makes the topic all the more timely. So, what does Mashinsky have to say about accredited investor laws? Celsians were affected negatively or positively by accredited investors laws, depending on your perspective. Papers, pleaseThose even casually researching early investment opportunities — crypto or otherwise — are sure to have encountered queries about their “accreditation” as investors. How exactly does one get accredited, and why does it matter — after all, why should anyone need to get permission to invest their own money?Roughly comparable accredited investor laws exist in many jurisdictions around the world, but nowhere do they appear to be as serious and prominent as in the United States, where the minimum threshold to be allowed to invest in many opportunities calls for $1 million in investable assets beyond one’s primary residence or annual income exceeding $200,000. A brief study of United States-based private investment funds might lead one to conclude that investment opportunities unavailable on the stock market are not meant for the commoners, who, by definition, lack accreditation. The US Accredited Investor law discriminates & takes opportunities to gain wealth away from >90% of the population. The governments reckless printing & mismanagement of money has created inflation of 8.5% & this law makes sure only the excessively wealthy can hedge against it.— Scott Kirk (@ScottKirk7) April 12, 2022 According to Jake Chervinsky, a lawyer and head of policy at the Blockchain Association, accredited investor laws came about as a consequence of the initial public offering process, which was put in place in the 1930s in response to “the speculative bubble of the 1920s when issuers took advantage of post-war prosperity to sell worthless securities to irrational investors.”“The goal was to give investors full and fair disclosure of material information so they could make informed decisions about their investments,” but the process became so expensive that companies complained, resulting in an exemption for “private placements” by accredited investors who were in less need of protection. Notably, many consider ICOs in the crypto world little more than an attempt to work around the IPO regulations.Scenes outside of Celsius HQ last week. Source: WikimediaThere are two sides to the logic: On one hand, accredited investors are more likely to have a solid enough grasp on business so as to make educated bets and avoid falling for scams, and on the other, such investors can afford to lose money when risky investments don’t work out.The rules, however, have many calling foul — the rich have the opportunity to get richer, while the poor are not even trusted to invest their own money. At worst, people see the system as one that is intended to keep the little guy down. 5/ To ease the burden on small businesses that wanted to raise capital by issuing securities, the SEC adopted Regulation D in 1982.Reg D provides an exemption from the registration requirement for “private placements” of securities with accredited investors.— Jake Chervinsky (@jchervinsky) April 25, 2019 “They’re made to kind of protect retail. Of course, many in the crypto space don’t see it that way,” explains Mashinsky. In April, the firm had to ban non-accredited U.S. investors from taking advantage of its yield products, which allow users to deposit tokens and earn interest on them. In the eyes of regulators, Celsius’ product was apparently too risky for average people.Events have subsequently turned out to lend credence to the regulators’ position.Accredited investor rules are closely tied to Know Your Customer and Anti-Money Laundering rules, which require companies to know who they are dealing with. ”It’s not like one or two rules; it’s probably like 100 different rules,” he says. Many companies just block all American users and investors due to the regulatory headache. When it comes to regulations, Mashinsky explains that there are two types of companies: those that take care to update their Terms & Conditions and adhere to the rules, and others that “think that none of these rules apply to them because they’re on some island in the Caribbean.” Celsius is in the first group, he clarifies.“Sooner or later, they come for you. I live in New York City, so I don’t have an option of living on some island.”Companies that fail to abide by regulations eventually face subpoenas followed by arrests of their executives, like BitMEX’s Arthur Hayes, who was recently sentenced to house arrest and probation due to an AML mishap. “It never ends well for them,” he adds. When setting up the CEL token, Celsius filed a Form D with the Securities and Exchange Commission, which is an exemption from having to register a securities sale and is only available to accredited investors. Mashinsky often refers to this as CEL being “registered with the SEC.” Mashinsky has been a regular on the Cointelegraph Top 100. Crypto bank runMashinsky explains that Celsius is an intermediary helping out non-technical crypto users.“Celsius is basically saying to people: ‘Look, we know most people don’t know how to manage keys… we will help manage keys for you, run the platform, and do staking on your behalf,’” Mashinsky explains.“Users have to decide if they want to ‘be their own bank.’ I would say maybe 1% of the population knows how to manage their keys — 99% of the population need to use Celsius.”Mashinsky is known to wear a Celsius-branded shirt with the text “banks are not your friends,” and his Twitter persona is that of a romanesque space-emperor — it was created by Cointelegraph’s artists for our annual Top 100. He sees Celsius much like a bank that safeguards the assets of its clients and pays them interest.There is one key difference, however. Real U.S. banks carry insurance with the Federal Deposit Insurance Corporation, which guarantees accounts up to $250,000 in the event of insolvency, meaning that mismanagement, bankruptcy, lawsuits or bank robberies can’t impact client holdings. Lacking such assurances, regulators don’t consider Celsius’ products fit for the non-accredited commoner — Mashinky’s 99%. Similarly, to accredited investor laws, the 1933 Banking Act was a response to the Great Depression in which up to a third of banks failed. It was designed to restore trust in the banking system and prevent bank runs, which is when clients race to withdraw their savings before others in fear of the bank going under… which causes the bank to go under.Now that Celsius has faced a bank run of its own in the wake of the crash in crypto prices and swirling rumors about its possible insolvency, the response has been, shall we say, classic — the doors have been slammed shut. .@CelsiusNetwork is pausing all withdrawals, Swap, and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community. More here: https://t.co/CvjORUICs2— Celsius (@CelsiusNetwork) June 13, 2022 No insuranceIf you read the fine print, which non-accredited investors rarely do, you’ll find a few salient points.“Celsius does not have an insurance policy,” states the company’s website, explaining that while assets held by Celsius are insured by fund custodian Fireblocks, the company generates income, or “rewards” as they call it, by lending assets to borrowers in which case they are no longer held by Celsius: “When these assets are out of Celsius’s control, they can’t be insured by such insurance.”In order to borrow funds from Celsius, borrowers must generally deposit 150% of the borrowed amount as collateral, according to the site. This means that by depositing $15,000 in BTC, one could borrow up to $10,000. A decrease in BTC price is likely to lead to a margin call, which may at worst result in Celsius selling part of the BTC in order to ensure that they have enough USD to cover the loan in case it goes unpaid. Sometimes, however, extreme market conditions can destabilize an exchange — much like rough waves can damage or even capsize a ship. Magazine profiled the founder in The adventures of the inventive Alex Mashinsky. It’s an old story in crypto land. One February day in 2014, the first Bitcoin exchange Mt. Gox simply went offline after months of struggling with timely withdrawals. Around $800 million in client funds went poof, and Bitcoin found itself in a multi-year bear market. The story repeated again in the next cycle, with dozens of exchanges from BTC-e to QuadrigaCX shutting their doors and disappearing for good, usually as a result of apparent hacks.“When you have either bad actors or you have situations where people lose money, regulators get very worried about making sure that everybody else is doing the right thing.”Will Celsius be the next “situation” in which a crypto provider goes under as it’s pounded by the waves of a bear market?Buyer bewareWhen DeFi-like platforms such as Celsius take deposits and offer loans in various stablecoins, they expose themselves to certain amounts of market turbulence. This can cause them to make large trades or moves in order to balance their books, themselves further contributing to the instability.Blockchain analytics company Nansen’s blockchain forensics research report on the UST stablecoin depegging suggests that it “resulted from the investment decisions of several well-funded entities, e.g. to abide by risk-management constraints or alternatively to reduce UST allocations deposited into Anchor.” Celsius was one of these well-funded entities, which, according to Bloomberg, pulled $500 million out of the Anchor lending protocol in the days before UST’s crash. Some in the Celsius community think its current woes are payback from big players who got burned in the collapse. Celsius and it’s community did not profit or benefit from the Luna/UST situation. At no point did Celsius have a position that would have benefited from a depegAs stated before @CelsiusNetwork did not have any meaningful exposure to the depeg— Alex Mashinsky (@Mashinsky) May 28, 2022 While it is obvious enough to state that cryptocurrencies such as BTC, Ether or LUNA can lose much or even all of their value, stablecoins have become a key pillar of the crypto economy to the point that they are treated as de facto USD. However, the likes of Tether, Binance USD or Dai are not actually US dollars at all, but abstractions of them, and may or may not hold up. Terra’s UST fell from $1 to less than $0.01 in the span of a month. The use of stablecoins is practically mandatory for those participating in the crypto marketplace where many platforms, including Celsius, do not deal in “real” US dollars but issue loans in the stablecoin of the borrower’s choice. Tokens are regularly traded against stablecoins, and one cannot deposit actual USD to earn “rewards.” But which stablecoins can users trust to maintain their peg? Mashinsky doesn’t see it as the platform’s responsibility to guide users on this.“Customers just have to do their homework — we don’t tell them what is good and what is not good. We don’t provide financial advice.”While many Celsians have made a considerable return over the past couple of years using the platform and remain devoted to it even during the latest turmoil, it’s at least understandable why regulators would want to prevent unsophisticated retail investors from getting burned on a platform like Celsius.“Regulators and lawmakers are trying to protect the public,” Mashinsky says in apparent agreement. Read more:The adventures of the inventive Alex Mashinsky