And another domino falls.
After Voyager Digital, another prominent crypto lender has just laid gone down, confirming that the liquidity crisis affecting the young industry is far from stabilizing.
Celsius Network filed for Chapter 11 bankruptcy on July 13, becoming the latest casualty of the cryptocurrency market crash that saw more than $2 trillion wipe out in less than nine months.
“Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilize its business and protect its customers," the firm, which has more than 100,000 creditors, explained in a press release.
“This is the right decision for our community and company,” said Alex Mashinsky, co-founder & CEO, Celsius.
Will Customers Get Their Money Back?
Celsius is a firm that operates as a bank in the crypto universe. Basically, it is an entity acting as intermediary between different actors. Its business model is to loan to hedge funds and other institutional investors the cryptocurrencies of his clients to whom it promises significant high yields.
The problem is that Celsius Network has lent money to funds that have invested in cryptocurrencies. But when the fall in cryptocurrency prices intensified after the collapse of Luna coin and its sister token UST or TerraUSD in May, customers of Celsius, like those of other lenders Babel Finance, Voyager Digital, BlockFi, began to rush to withdraw their money. Faced with this rush, the lenders did not have enough in reserve to satisfy everyone, hence the decision of many of them to suspend withdrawals.
When Luna and USD crashed, Celsius struggled to withdraw funds from their ecosystem Terra Anchor Protocol, which promised 20% returns on deposits for example.
"Without a pause, the acceleration of withdrawals would have allowed certain customers—those who were first to act—to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery," Celsius explained on July 13.
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It is unclear whether Celsius customers will be able to recover their funds simply because the company had said that their assets were considered unsecured and not guaranteed in the event of insolvency.
'Bad Risk Management'
"Huge swathes of Celsius’s retail userbase could be negatively impacted through no fault of their own, but through bad risk management at the company," said Marius Ciubotariu, the co-founder and CEO of crypto platform Hubble Protocol. "These users had no clarity on how their money was being used and have now no doubt lost faith in Celsius and similar platforms."
"The news that Celsius now faces bankruptcy is just another example of the consequences that come of non-transparent, institutionalized lending structures," commented Stefan Rust, the CEO of crypto platform Truflation and Laguna Labs. "These structures take advantage of the financial situation, and their opacity typically leads to steep losses for the average investor.”
After suspending customer withdrawals on June 12, Celsius has spent the last 30 days repaying over $900 million in debt owed to decentralized finance apps Aave, Compound and MakerDao. according to blockchain data and tracker Zapper.
This special treatment is debated because the firm seems to have favored these creditors to the detriment of its users.
Kirkland & Ellis is serving as legal counsel for Celsius. Centerview Partners is a financial adviser and Alvarez & Marsal is the restructuring adviser.
Celsius also allowed anyone to borrow cryptocurrency and earn interest for lenders. "Earn high. Borrow low. Change the world," the firm says on its website. One of its catch phrases is "Borrow like a Billionaire." The platform, through its CEL token, promises "financial rewards" as much as 30% extra returns weekly. But some options are not available to U.S. based users.
When it raised $400 million last October from investors led by WestCap and Canadian Caisse de dépôt du Québec (CDPQ), Celsius Network saw its valuation soar to $3 billion.
The firm, which operates like a traditional bank, had more than $8.20 billion loaned out to clients, $11.82 billion in assets under management and had more than 2 million customers as of May 17 of this year, according to its website.
On July 13, the platform said it has $167 million in cash on hand, "which will provide ample liquidity to support certain operations during the restructuring process."
