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Most of the insolvent cryptocurrency lenders, CeFi's liabilities, are client deposits, which some feel may not be refunded.
The crypto lending platform's $1.2 billion shortfalls, mainly caused by user deposits, were one of the unpleasant discoveries disclosed by Celsius's bankruptcy petition.
A chapter 11 bankruptcy petition issued by Celsius CEO Alex Mashinsky on July 14 reveals the business has around $4.3 billion in assets and $5.5 billion in liabilities, resulting in a deficit of $1.2 billion.
User deposits constituted the majority of liabilities at $4.72 billion, while Celsius’ assets consist of CEL tokens valued at $600 million, mining assets valued at $720 million, and $1.75 billion in crypto assets.
According to CoinGecko statistics, the total market capitalization of CEL tokens is just $321 million, which has caused some in the crypto world to be suspicious of their worth.
Among the crypto assets are 410,421 Lido Staked ETH (stETH) tokens valued at around $479 million that generate 5% APY but cannot be redeemed for Ether (ETH) until the Ethereum network changes to Proof-of-Stake consensus in the Merge.
Alex Mashinsky, the chief executive officer of Celsius, signed a contract saying that the firm might sell Bitcoin (BTC) produced by its Celsius Mining Bitcoin mining operation to “create sufficient assets” to repay at least one of its debts and earn future income. The business anticipates generating about 15,000 BTC through 2023.
Cory Klippstein, the inventor of Swan Bitcoin, deplores Celsius and Voyager’s recent choice to file for Chapter 11 instead of the Securities Investor Protection Act (SIPA).
Klippstein stated in a tweet on July 14 that registering under SIPA would have transferred ownership of the firm’s assets to its clients, therefore returning at least a portion of their deposits.
In Chapter 11 bankruptcy proceedings, the petitioning firm asserts ownership of all assets. Under SIPA, a bankrupt company must either transfer its accounts to another company or be liquidated and distribute the proceeds to investors.
Frances Coppola, an economist and blogger skeptical about cryptocurrencies, published a blog post on July 14 in which she explained why she believes Celsius depositors “won’t receive their money back.”
She contends that Celsius operates a “shadow bank,” which Investopedia defines as a non-bank “unregulated financial intermediary.”
“Deposits in banks aren’t even ‘customer assets,’ let alone’ assets under management.’ They are unsecured loans to the bank. They are thus liabilities of the bank and fully at risk in bankruptcy.”
“Depositors in a bank do not have any legal right to return their funds. Even if the terms of the account say funds can be withdrawn whenever the customer chooses, the bank can refuse to allow customers to withdraw their funds if it doesn’t have the cash to pay them,” she explained.
Coppola noted that Celsius’s terms of service make it apparent that the company may do anything it wants with consumer deposits.
It further specifies that in the case of bankruptcy, clients may not receive all or all of their money returned.
Since January, CEL has decreased by 84 percent, from $4.38 to $0.73, with a rise in June coinciding with a community squeeze effort.