After Celsius filed for bankruptcy, customers of the crypto lender will have to wait anxiously to find out if, how and when they will receive their money back. This company was one of the largest victims of the crash in crypto markets this past year.
Celsius stopped withdrawals due to extreme market conditions in June. This move reverberated throughout the crypto world and beyond, causing a $300 billion sale of digital assets and leaving legions behind.
Celsius Network, which is located in New Jersey, disclosed a $1.2 billion gap in its balance sheet this week when it filed for Chapter 11 bankruptcy. read more
Six lawyers who specialize in restructuring and bankruptcies told Reuters that customers should be prepared for a bumpy ride while they wait to find out what will happen to their money.
The lawyers stated that there is little precedent for bankruptcy at large crypto companies and the possibility of multiple lawsuits against Celsius. Also, due to the complexity of any restructuring, the Chapter 11 process will likely be slow.
Ropes & Grey’s Daniel Gwen said that “this could last for many years.” “It is highly probable that there will be a lot more litigation.”
Celsius didn’t respond to our requests for comment.
The pandemic saw crypto lenders flourish, offering retail customers double-digit rates that traditional banks were unable to offer in return for crypto asset deposits.
Hedge funds and institutional investors paid higher rates to lenders to borrow the coins. Celsius was able to make a profit. Also, lenders invested in decentralised finance markets that were more risky.
As surging inflation rates caused crypto markets to plummet this year, a flight towards safer assets was triggered. Two major tokens, terraUSD (and luna) failed and lenders turned their backs on the wholesale crypto market.
After suspending withdrawals, deposits and withdrawals from Voyager Digital in the United States, Voyager Finance in Singapore and Vauld in Hong Kong also filed for bankruptcy.
Companies can file Chapter 11 bankruptcy to plan their turnaround while still being operational.
Major crypto companies have been in financial trouble before, including the Japanese exchange Mt. According to the lawyers, Gox failed in 2014 and there are no precedents for how customers should be treated by stricken lenders.
James Van Horn, a partner at Barnes & Thornburg, Washington, stated that “it is at best unknown how the bankruptcy code will treat cryptocurrency companies.”
Three lawyers stated that creditor committees established as part of bankruptcy proceedings are likely to try to shape any reorganisation plan determined by Celsius. The company can be sued by creditors even during bankruptcy proceedings.
According to Stephen Gannon, partner at Davis Wright Tremaine, “It’s likely going to take, considering the complexity of the situation, six months at minimum to develop a plan for coming out of bankruptcy.” This is going to be three-dimensional Chess.
Chapter 11 bankruptcyes tend to prioritise repayments first to secured creditors, then to unsecured creditors, and finally, equity holders.
Van Horn stated that “unsecured creditors” have no right to any funds or other assets. Everything’s been mixed together. “Unsecured creditors sometimes get a very small amount.”
“LAST ON THE LIST”
Celsius claimed in court filings this past week that it had more then 100,000 creditors.
It had 23,000 outstanding loans to retail customers, valued at $411 million. The loan was backed by crypto collateral of $766 million.
Celsius listed the 50 largest creditors but did not mention the order they would be paid. Many of its 1.7million clients are also individual investors.
Martin Jabou, 27, a Hamilton resident, is one of them. Although crypto assets valued at $45,000 were put into Celsius by Jabou, they now have a value of less than half.
He said that he believed they would be the last to pay any bankruptcy repayments. “I don’t know how I can afford rent or car payment, especially considering the other debts I have.”
The actions of crypto lenders like Celsius were similar to those of banks. However, unlike mainstream lenders, there’s no safety net for Jabou if crypto platforms fail.
Deposits up to $250,000 in U.S. banks are covered by a federal agency. A separate body insures broker-dealer clients for up to $500,000 cash and securities.
Similar deposit protection programs exist in Britain and the European Union.
Although it is unclear how Celsius will categorize its clients, it did warn customers that it might treat them as unsecured creditors. Customers are likely to sue over such a status. Max Dilendorf, a New York lawyer specializing in crypto, stated that Celsius does not know the exact classification of its clients.
He said, “It will not be a typical case to see why customers should have been classified as unsecured creditors.”