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Customers of crypto lender Celsius are facing a long and anxious wait to know how, when and if they will ever get their money back after the company filed for bankruptcy and became one of the biggest victims of the collapse in crypto markets this year. Citing extreme market conditions, Celsius froze withdrawals in June, which reverberated across the crypto world and beyond, sparking a $300 billion selloff in digital assets and leaving legions of retail investors cut off from their savings.
Celsius Network, which is based in the US state of New Jersey, revealed a gaping $1.2 billion hole in its balance sheet when it filed for Chapter 11 bankruptcy in New York this week. Customers should now buckle up for a bumpy ride as they wait for clarity on the fate of their money, six lawyers specializing in bankruptcy, restructuring or cryptocurrencies told Reuters.
Given the scant precedent for major crypto bankruptcies, the prospect of numerous lawsuits against Celsius, as well as the high complexity of any restructuring, the Chapter 11 process is likely to be slow, lawyers said.
“This could take years,” said Daniel Gwen of the law firm Ropes & Gray in New York. “It is highly likely that there will be many lawsuits.”
Celsius did not respond to requests for comment. Cryptolenders have boomed during the pandemic, luring retail customers with double-digit rates rarely offered by traditional banks in exchange for their crypto-asset deposits. On the other hand, institutional investors like hedge funds paid lenders a higher rate to borrow the coins, so firms like Celsius benefited from the difference. Lenders also invested in riskier, so-called decentralized financial markets.
“Three Dimensional Chess”
As crypto markets tumbled this year as soaring inflation spurred a flight to safer assets and two major tokens — terraUSD and luna — failed, lenders’ riskier bets on wholesale crypto markets soured.
US crypto lender Voyager Digital also filed for bankruptcy this month after suspending withdrawals and deposits, while smaller Singaporean lender Vauld and Hong Kong-based Babel Finance also froze withdrawals.
Chapter 11 bankruptcies allow companies to prepare turnaround plans while remaining operational. While major crypto firms have failed before, most notably Japanese exchange Mt. Gox in 2014, there is little precedent for the treatment of customers by stricken crypto lenders, the lawyers said.
“It is unknown at best how bankruptcy law and bankruptcy courts will treat cryptocurrency companies,” said James Van Horn, a partner at Barnes & Thornburg in Washington. Creditor committees formed as part of the bankruptcy proceedings will likely seek to shape any reorganization plan Celsius decides on, three lawyers said. Creditors can also make claims against the company even while it is going through the process.
“Given the complexity, it will likely take at least six months to develop a plan to emerge from bankruptcy,” said Stephen Gannon, a partner at Davis Wright Tremaine. “This will be three-dimensional chess.
Generally, Chapter 11 bankruptcies prioritize payments to secured creditors, then unsecured creditors, and then equity holders. “(The unsecured creditors) don’t have any reserved rights to any funds or anything, everything has been commingled,” Van Horn said. “Sometimes it’s a very small amount that unsecured creditors get.”
‘Last on the List’
Celsius said in court filings this week that it has more than 100,000 creditors. As of July 13, it had approximately 23,000 outstanding loans to retail borrowers worth $411 million, which were secured by $766 million worth of crypto collateral, it said in a filing Thursday.
While Celsius listed its top 50 creditors, it did not mention the order in which they would be repaid, and many of its 1.7 million clients are individual investors. One of them is Martin Jabou (27), who lives in Hamilton, Canada. He put about $45,000 worth of crypto assets into Celsius, though they are now worth less than half that.
“I think we’ll be last on the list,” he said of potential bankruptcy payments. “I don’t know how I’m going to afford the rent or the car, especially with the other debts I have.” Cryptolenders like Celsius acted similarly to banks. But unlike mainstream lenders, there’s no safety net for people like Jabou when crypto platforms fail.
In US banks, deposits up to $250,000 are federally insured. Broker-dealer clients are insured up to $500,000 in securities and cash by a separate authority.
Similar deposit protection systems exist in the European Union and Britain. Although it is unclear how Celsius will classify its clients, it has warned customers that it may treat them as unsecured creditors — and customers are likely to file lawsuits over that status, said Max Dilendorf, a New York-based cryptocurrency attorney. “It will be a rare case to see why customers should be classified as unsecured creditors,” he said.
