Celsius bankruptcy proceedings show complexities amid fading recovery hopes

Celsius bankruptcy proceedings show complexities amid fading recovery hopes

The Celsius Network is one of many crypto lending companies that has been wiped out as a result of the so-called “crypto contagion”.

Rumors of Celsius’ insolvency began circulating in June after the crypto lender was forced to halt withdrawals due to “extreme market conditions” on June 13 and eventually filed for Chapter 11 bankruptcy. a month later, on July 13.

The crypto lending company showed a balance gap of $1.2 billion in its bankruptcy filing, with most of the debt owed to its users. User deposits made up the majority of liabilities at $4.72 billion, while Celsius assets include CEL tokens as assets valued at $600 million, mining assets worth $720 million dollars and $1.75 billion in crypto assets. The value of CEL tokens, however, has drawn suspicion from some members of the crypto community, as the total market capitalization of CEL is only $494 million, according to CoinGecko data.

Iakov Levin, CEO of centralized and decentralized financial platform Midas, told Cointelegraph that the CEL token’s value issue could negatively affect its holders. He explained:

“Celsius calculated the CEL token denominated as $1 per token, requiring someone to be willing to pay that price for the bankrupt token. The situation is grim not only for Celsius users but also for CEL token holders. CEL has become a sad example of how certain events can cause a domino effect, and the broader digital asset market can suffer.

At the time of its bankruptcy filing, the company said it intended to use $167 million in cash to continue certain operations during the restructuring process and said it intended to “restore activity across the platform” and to “deliver value to customers.”

A new bankruptcy report filed nearly a month after it filed for Chapter 11 bankruptcy showed that the crypto lender’s actual debt is more than double what the firm showed in July. The report revealed that the company has net liabilities worth $6.6 billion and total assets under management of $3.8 billion. When it filed for bankruptcy, the company posted about $4.3 billion in assets versus $5.5 billion in liabilities, which is a difference of $1.2 billion.

Pablo Bonjour, managing director of Macco Restructuring Group, who has worked with several crypto companies going through bankruptcy proceedings, explained why Celsius’s balance gap has grown and what awaits the struggling crypto lender. He told Cointelegraph:

“Celsius is really no different than most Chapter 11 bankruptcies in that the debt or deficit ‘hole’, if you will, sometimes turns out to be larger than originally anticipated, particularly in terms of is about cryptocurrency and valuations based on who and what they owe.”

“It’s too early to say how things will develop, and Celsius still has a ways to go before we can sort things out, but I’m sure all the professionals on all sides are working hard for a better result. I foresee a interesting road ahead and if the reviewer is approved, I look forward to reading the reviewer’s report. Of course, this may not be ready until late 2022. We’ll just have to wait and see,” he added.

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With its current debt and cash flow at hand, Celsius is expected to run out of cash by October. A court filing shows Celsius’ three-month cash forecast, which estimates a sharp drop in cash, indicates the company will experience a drop of about 80% in cash from August to September.

Brian Pasfield, CTO of decentralized finance protocol Fringe Finance, explained the critical issue that led to crypto contagion in the first place. He told Cointelegraph:

“For centralized platforms to compete with fully decentralized alternatives, they need to solve their overhead. However, since decentralized competitors are empowered by lack of overhead, this makes it impossible for players like Celsius to sustain themselves without incurring frailty strategies, which led to this mess in the first place.

Celsius’ bankruptcy process gets more complicated

Bankruptcy court proceedings for the struggling crypto lender are getting more complicated by the day. First, Celsius’ lawyers made it clear that the chances of users getting their crypto back is legally impossible since they waived their rights by signing the terms and conditions.

In Celsius’s first bankruptcy hearing, attorneys from Pat Nash-led law firm Kirkland detailed how retail users with Earn and Borrow accounts transferred title to their coins to the company in accordance with its terms of service. As a result, Celsius is free to “use, sell, pawn and remortgage these coins” as it sees fit.

Terms of Service for Celsius Accounts. Source: Celsius presentation

Through “day one” motions, Celsius said it intended to pay employees and maintain their benefits. The company said it will also continue to service existing loans with maturity dates, margin calls and interest payments to continue as in the past. Celsius has also appointed a new director to guide it through the restructuring process, including David Barse, a so-called “pioneer” distressed investor who is the founder and CEO of index firm XOUT Capital.

The case took another turn when the US administrator’s representative overseeing the case claimed there was “no real understanding” of the nature or value of Celsius’s crypto holdings — or the where he keeps them. The trustee has asked an examiner to examine allegations of “gross incompetence or mismanagement” as well as “significant transparency issues” surrounding Celsius’ operations in the context of the bankruptcy case.

Anna Becker, CEO and co-founder of EndoTech explained to Cointelegraph what ultimately led to the downfall of Celsuis, she told Cointelegraph:

“Celsius built more than a loaner machine. He built a strong community of motivated believers. This is an example of a company that has been very aggressive and successful in its acquisition efforts, but half-hazardous in its risk management. His “tribe” of believers is optimistic but will have to face the harsh realities of his risk management and bankruptcy. So while there is a lot of excitement in the community, the value crater is real and continues to deepen.

On August 17, Chief Bankruptcy Judge Martin Glenn of the Southern District of New York approved Celsuis’ request to run BTC mining and sell-off operations as a means of restoring financial stability, against the objections of the U.S. administrator. This means that they may have the option of continuing as an entity and surviving bankruptcy, of course on a reorganized and restructured basis instead of liquidation.

Celsius community efforts may not be successful

The Celsius community remained strong after the funds were frozen and throughout the bankruptcy proceedings.

There’s also an unofficial community-led stimulus that seems to be gaining traction on Twitter under the hashtag #CELShortSqueeze. The movement is attempt to force short sellers of the Celsius token to cover their short positions by deliberately increasing the price of the CEL token through mass buying and withdrawals of the token from various exchanges.

The price of CEL rose from $0.67 on June 19 to $1.59 on June 21, a 180% spike compared to the 12.37% rise in the crypto market during the same period. However, experts believe that the impact of the short squeeze will not be long lasting.

Jackson Zeng, CEO of crypto brokerage Caleb & Brown, told Cointelegraph: “Celsius owns the majority of CEL, which is 90% based on Etherscan, but cannot sell or move the token during its process. However, traders still have to pay 0.5-2.5% per day to sell the token, which is why many have been forced to close their short positions over the past couple of months,” adding:

“A bankrupt company is unlikely to have a positive path ahead. Once the deal is unlocked, the shorts can be hedged, which negatively impacts the price and removes the effect of the short squeeze.

Celsius CEO Alex Mashinsky reportedly “took control” of the crypto lending firm’s business strategy amid rumors in January that the US Federal Reserve was planning to raise interest rates.

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According to a Financial Times report, Mashinsky personally directed individual trades and financial experts canceled in an effort to protect Celsius from anticipated crypto market declines. The CEO of Celsius reportedly ordered the sale of “hundreds of millions” of Bitcoin in one instance, buying the coins back less than 24 hours later at a loss.

As the bankruptcy proceedings reveal more complexities with the crypto lender, Celsius could face a similar fate to many of its peers, including Voyager, BlockFi and Hodlnaut.