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During its first bankruptcy hearing on Monday, counsel for crypto lender Celsius stated that it owes more than $5 billion to half a million creditors.
The business said on June 12 that it was suspending all client withdrawals, citing "extreme market conditions." Last Monday, the business filed for Chapter 11 bankruptcy protection in the Southern District of New York (SDNY).
The predicament at Celsius is not exceptional: the lender is one of numerous that have been severely affected by the Terra/LUNA crash, the bankruptcy of Three Arrows Capital, and the current market slump.
To meet client withdrawal requests, struggling crypto lender BlockFi secured a $250 million bailout from crypto exchange FTX. FTX might purchase BlockFi for an additional $240 million. Less than three weeks after Celsius ceased withdrawals, Voyager Digital filed for Chapter 11 bankruptcy in SDNY on July 6.
The majority of Celsius’ debtors are typical retail investors, as depicted by the court documents. The firm has a massive (at least) $1.2 billion hole on its financial sheet, and ordinary depositors who stored cryptocurrency in Celsius accounts will likely be the last to be refunded.
Chapter 11 bankruptcy, commonly known as “reorganization bankruptcy,” prevents creditors from pursuing a civil lawsuit and gives the corporation time to reorganize its finances and settle its obligations.
The documents submitted to the Southern District by Celsius’s law firm Kirkland & Ellis demonstrate the company’s severe insolvency.
Before filing for bankruptcy, Celsius’ digital asset assets decreased to $1.7 billion on July 14, down from $14.6 billion at the end of March. The filings also reveal that Celsius owes $4.7 billion to its clients, nearly three times its digital asset holdings.
In addition to $170 million in cash kept in a bank, the majority of Celsius’s assets consist of mining equipment ($720 million), outstanding debts ($620 million), and additional support ($450 million). The records also account for $600 million in the platform’s CEL token, which is far more significant than the coin’s market capitalization. (The CEL coin is subject to Securities and Exchange Commission oversight.)
The businesses said that most of the decline was attributable to the steep decline in cryptocurrency prices, which reduced their assets by $12.3 billion.
The remaining losses amounted to: Until June 12, when the business banned withdrawals, users withdrew $1,9 billion from deposits.
The firm’s assets decreased by additional $1.9 billion due to loan redemptions and liquidations.
Tether, the issuer of the largest stablecoin on the market and a stakeholder in Celsius, set the company back an extra $900 million by liquidating a loan. (Tether released a statement on their liquidation.)
In addition, the business lost $100 million in investments.
Another document submitted to the court detailed the crypto lender’s “unanticipated losses to the business.”
Specifically, the Ethereum staking platform StakeHound lost access to 35,000 ETH ($50 million at current rates) put by Celsius to earn a dividend “due to a claimed mistake by StakeHound’s third-party cryptocurrency custody service Fireblocks.”
Currently, StakeHound and Fireblocks are engaged in a lawsuit on the topic.
Celsius is owed $439 million by a private lender, purportedly the Indianapolis-based lending platform EquitiesFirst, for failing to return the collateral for a loan repaid.
Celsius confessed it lost around $15.8 million in Terra’s collapse, but, as the company’s legal counsel stated during today’s hearing, “widespread and wholly incorrect Twitter and social media comments” caused a run on its deposits in the first place.
Monday’s hearing and several court documents, including a 61-page affidavit from CEO Alex Mashinsky, reveal that Celsius’ strategy to repay its losses relies mainly on the anticipated future revenues of its partially completed, wholly-owned mining subsidiary, Celsius Mining.
However, this subsidiary mining company is also a creditor. Monday, Celsius’s attorneys urged the court to authorize spending of over $5 million to complete the building of a mining facility in Texas (which Celsius’s attorneys said would take another two months) and to pay tariffs on mining rigs “currently sitting with the customs authorities.”
Judge Martin Glenn, chief judge of the U.S. Bankruptcy Court for the Southern District of New York, authorized the motion on an interim basis; nevertheless, the U.S. Trustee — a division of the Department of Justice that oversees the administration of bankruptcy cases – would eventually control the funds.
Shara Cornell, an attorney with the U.S. Trustee Program, expressed her worries about the feasibility of Celsius’ mining business during Monday’s session.
“There’s one mining company that I don’t believe is currently operable, but has caused the debtor a considerable amount of money. I’m not clear if construction may or may not be the best avenue for the debtor at this time,” Cornell informed the court. “Why not just consider liquidating it and move on?”
The attorneys for Celsius fought back, stating that Celsius’ business already encompassed more than 43,000 mining rigs, with intentions to reach 112,000 mining rigs “sometime in the second quarter of 2023.”
Pat Nash, the chief counsel for Celsius, said to the court that the subsidiary was mining around 14.2 bitcoins per day and anticipated mining 10,100 bitcoins by 2022.
“If everything goes well, in 2023 we hope and expect to be in a position to mine approximately 15,000 bitcoin a day,” Nash pointed the court (Nash presumably meant 15,000 bitcoins in the entire year, as only roughly 900 total bitcoins can currently be mined per day).
Even if Celsius’ pledges to mine 10,100 this year are correct (which is difficult to verify independently), at current market pricing, it would only earn around $225 million – a fraction of what is required to keep Celsius viable.
When Celsius begins repaying its $5.5 billion in obligations, $4.7 billion of which represents client assets, its customers will very definitely receive their funds last.
And at that time, there may be no money left.
“Celsius has set the stage for conflict between its customers and its sophisticated institutional investors,” Daniel Gwen, a business restructuring associate at New York-based law firm Ropes & Gray informed CoinDesk. “In particular, Celsius has pointed out in its pleadings that customers transferred ownership of crypto assets to Celsius, making those customers unsecured creditors. This detail may undercut customer expectations, who thought they were depositing their assets into a construct similar to a traditional bank,” Gwen added.
Monday, Nash told the court that Celsius has around 500,000 depositors, of which 300,000 have more than $100 worth of cryptocurrency in their accounts.
The counsel for Celsius requested that the judge redact names and other personally identifying information from Celsius’ creditor matrix and other papers, citing the employees’ and creditors’ fears for their safety.
“These cases have generated a lot of press and social media commentary. Certain employees have been receiving death threats and hate mail,” an attorney for Celsius notified the court. “We received certain communications from scheduled corporate creditors stating that corporate principals have been receiving death threats and hate mail as well.”
The second hearing in Celsius’s insolvency proceedings will be held remotely on August 10.
The United States Trustee is currently creating and appointing a committee of creditors. Typically, these committees are comprised of the seven largest unsecured creditors of the debtor and assist the court in formulating a restructuring plan for the company’s debt.
