Clients of crypto lender Celsius face long waits for the fate of their funds
Customers of cryptocurrency lender Celsius face a long and eager wait to know how, when and even they will get their money back after the company filed for bankruptcy this year. Became one of the biggest victims of the collapse in the crypto markets.
Citing extreme market conditions, Celsius halted withdrawals in June, which reverberated through the crypto world and beyond, selling $300 billion in digital assets and cutting legions of retail investors out of their savings. Gone.
Celsius Network, based in the US state of New Jersey, disclosed a $1.2 billion gap in its balance sheet when it filed for Chapter 11 bankruptcy in New York this week.
Six lawyers specializing in bankruptcy, restructuring or crypto told Reuters that clients should now be in for a bumpy ride as they await some clarity on the fate of their money.
Lawyers said that with little precedent for bankruptcy in large crypto companies, the potential for multiple lawsuits against Celsius, as well as the high complexity of any reorganization, are likely to slow the Chapter 11 process.
“It can go on for years,” said Daniel Gwen at the Ropes & Gray law firm in New York. “It’s highly likely that there are going to be a lot of lawsuits.”
Celsius did not respond to requests for comment.
Crypto lenders boomed during the pandemic, attracting retail customers with double-digit rates rarely offered by traditional banks in exchange for their crypto asset deposits.
On the other hand, institutional investors such as hedge funds paid higher rates to lenders to borrow coins, allowing firms such as Celsius to profit from the difference. Lenders also invest in riskier, so-called decentralized finance markets.
‘Three Dimensional Chess’
When crypto markets tumbled this year as inflation rates took off for safe haven assets and two major tokens – TeraUSD and Luna – failed, risky bets by lenders on wholesale crypto markets turned sour.
US crypto lender Voyager Digital also filed for bankruptcy this month after suspending withdrawals and deposits, while smaller Singapore-based lender Wald and Hong Kong-based Babel Finance have also halted withdrawals.
Chapter 11 bankruptcy allows companies to devise a turnaround plan while they are in operation.
Although major crypto firms have failed before, notably Japanese exchange Mount Gox in 2014, stricken crypto lenders have little precedent for treating customers, lawyers said.
“It is unknown, at best, how the bankruptcy code and bankruptcy courts will treat cryptocurrency companies,” said James Van Horn, partner at Barnes & Thornburg in Washington.
The three lawyers said creditors’ committees formed as part of the bankruptcy proceedings would try to give shape to any restructuring plan decided by Celsius. The creditors can also make a claim against the company even though it is going through the process.
“It’s probably going to take at least six months, given the complexity, to develop a plan to come out of bankruptcy,” said Stephen Gannon, partner at Davis Wright Tremaine. “It’s going to be three-dimensional chess.”
In general, Chapter 11 bankruptcies prioritize repayments to secured creditors, then to unsecured creditors, and then to equity holders.
“(Unsecured creditors) have no rights to any funds or anything, everything is mixed up,” Van Horn said. “Sometimes it’s a very small amount that goes to unsecured creditors.”
‘Last on the list’
Celsius said in court filings this week that it had more than 100,000 creditors.
It said in a filing on Thursday, as of July 13, there were approximately 23,000 outstanding loans worth $411 million to retail borrowers, backed by crypto collateral.
While Celsius listed its largest 50 creditors, it made no mention of the order in which they would be repaid and many of its 1.7 million customers are individual investors.
One of them is Martin Jabou, 27, who lives in Hamilton, Canada. They put about $45,000 worth of crypto assets into Celsius, although they are now worth less than half that.
“I think we’re going to be last on the list,” he said of any repayment from bankruptcy. “I don’t know how to pay rent or car, especially with the other loans I have.”
Crypto lenders like Celsius acted similarly to banks. But unlike mainstream lenders, there is no safety net for people like Jabu when crypto platforms fail.
In US banks, deposits up to $250,000 are insured by a federal body. Broker-dealer clients are insured by a separate entity for up to $500,000 in securities and cash.
Similar deposit protection schemes exist in the European Union and the UK.
While it is unclear how Celsius will classify its customers, it warned customers that it could treat them as unsecured creditors – and that customers are likely to be prosecuted for such status, according to New York Specializing in Crypto. Lawyer Max Dillendorf said.
“It would be a unique case to see why customers should be classified as unsecured creditors,” he said.