One of the first things you learn in cryptocurrency is that if you don’t hold the private keys to your crypto wallet, then you do not own the crypto in that wallet. Unfortunately, this is a lesson that many are learning the hard way as centralized crypto platforms and exchanges start to go bankrupt, and the latest one to bite the dust is Celsius. Today I’m going to give you a bit of background on Celsius, explain what its bankruptcy means in simple terms, how the company plans to recover and when its users could get their crypto back.
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What is Celsius?
Let’s talk about Celsius’s bankruptcy. Before we go any further, though, I briefly want to talk about Celsius’s CEL token, which is or rather was, used to earn higher interest rates on crypto savings and pay lower interest rates on crypto loans. It should be noted that the CEL token was never sold to retail investors in the United States, nor was it available on cryptocurrency exchanges in the country. This will be relevant later.
Like many crypto platforms, Celsius was known for offering high interest rates on crypto savings. Celsius achieved these high interest rates by doing anything it needed to behind the scenes to earn the yield it was promising to its users with user crypto and the company would keep the difference.
At its peak, Celsius claimed to have 1.7 million users who had deposited over $30 billion in coins and tokens on its platform. This massive amount of crypto was earning an estimated $3 million in yield per day, which was paid out weekly, specifically on Mondays. Naturally, a portion of this massive yield was used to buy back and burn the CEL token, which would cause its price to go up over time.
Although many critics had been warning for a long time that Celsius’s business model was unsustainable. For a while, it was fine, but following a big deviation between the price of ETH and Lido Finance’s stETH token in early June caused by the selling of stETH, users started to listen closely to those critics who by that point were claiming that Celsius had gone insolvent. On the 13th of June, it became clear that Celsius was in trouble, and on the 14th of June, Celsius paused all withdrawals indefinitely.
Anyway, after Celsius paused all withdrawals, many began counting down the days to Celsius’s bankruptcy declaration. For a while, it looked like Celsius was fine as the platform began paying back hundreds of millions of dollars in DeFi loans to reclaim billions in crypto collateral.
Then, on the 13th of July, Celsius announced that it had officially filed for Chapter 11 bankruptcy, exactly one month after the platform began. It had paused withdrawals exactly one week after Celsius’ competitor, Voyager Digital, had filed for bankruptcy on that note (you may have heard that Celsius and Voyager hired the same bankruptcy lawyers). While some have taken this as a sign that something significant is afoot, it can be simply explained by the fact that this particular law firm is the best that money can buy for crypto bankruptcy proceedings.
You might also have heard that filing for Chapter 11 bankruptcy by both entities was a selfish move as it gives them total control of the assets on their respective platforms. Aside from the fact that this was already in the terms and conditions, any alternative route would have resulted in instant liquidation.
In other words, if Celsius or Voyager had filed for any other kind of bankruptcy, the coins and tokens on their platforms would be immediately sold. This would not only mean that users have zero chance of getting their crypto back, but it would also certainly crash the crypto market.
As many cryptocurrency headlines have reported, Celsius is about $1.2 billion in debt. It has around $4.3 billion in assets and $5.5 billion in liabilities, i.e., debt. The thing is that Celsius claims its sold token holdings are worth 600 million, and some would argue that these tokens are now worthless. Even if they aren’t, it would be impossible for Celsius to sell CEL so much without crashing the price, especially during a crypto bear market.
As such, it’s safe to say that Celsius is closer to being 1.8 billion in the hole, but again, this is up for debate. What’s more is that this barely scratches the surface of the chaos that was going on behind the scenes at Celsius, as per the company’s bankruptcy filing.
In section B of the introduction to the bankruptcy filing, Celsius admits that it was growing too quickly and was taking very big risks behind the scenes that repeatedly put it in and out of the hole, so to speak. Celsius goes on to cite the crypto crash caused by Terra’s implosion as a big factor in its bankruptcy, as well as the resulting fund that began circulating on social media after Terra collapsed, leading to large amounts of user withdrawals.
Celsius was actually one of the first entities to pull its money out of Terra’s ecosystem when it deviated from its peg. Hence, Celsius wasn’t directly affected by the death spiral that unfolded in the days that followed.
Even so, Celsius admitted in its bankruptcy filing that it had also deposited large amounts of customer crypto into platforms and protocols from which it could not immediately withdraw, which is why it paused user withdrawals in early June when the platform experienced a bank run.
For what it’s worth, Celsius confirmed in its bankruptcy filing that it’s paid off all its DeFi debts and has therefore reclaimed control of its collateral. Ironically, this has apparently led to concerns that Celsius will eventually sell its massive stETH position, which it has been using as collateral for DeFi loans.
Anyhow, later in the bankruptcy filing, Celsius gives more details about what caused the company to go bankrupt. It begins by acknowledging that the company lost around 70 million worth of ETH in the Steakhound hack last year.
Now this is peanuts compared to the more than $500 million in collateral that Celsius gave to an unspecified company for a loan, which we now know to be EquitiesFirst, an investment firm based in the United States, which subsequently notified Celsius that it could not pay back the collateral when it came to repay the loan it had taken out against said collateral.
According to the filing, EquitiesFirst has been gradually repaying to the tune of $5 million per month since July, and according to the Financial Times, EquitiesFirst still has 440 million dollars to repay, which will take some time.
After talking about the effects of the pandemic and the ongoing war in Ukraine, Celsius now talks about how the Fed’s interest rate hikes have been crushing all asset markets. You know, the usual stuff.
Regarding the crypto market, Celsius discusses Terra’s collapse and how this likely led to the collapse of crypto hedge fund Three Arrows Capital, which in turn led to Voyager Digital’s bankruptcy. The emergence of Lido Finance’s STE token and the rumors about Celsius’s insolvency that followed.
What’s interesting is that the end of Celsius’s bankruptcy filing reveals the top 50 creditors of the crypto platform, many of whom are users. As you can hopefully see, the top 10 had deposited more than 15 million each, with the largest creditor being owed a whopping $81 million.
Shortly after Celsius filed for bankruptcy, a bunch of crazy yet expected news started to come out, and the most memorable headlines were related to comments by Timothy Cradle, Celsius’s former director of financial crimes compliance, who decided to speak out after the bankruptcy filing.
Timothy told CNBC that Celsius’s bankruptcy was fundamentally caused by the fact that they weren’t managing their risks properly and they weren’t even allocating capital towards addressing these risks. Oddly enough, Timothy said that the company wasn’t necessarily corrupt, just very poorly managed. I say odd because Timothy also said that Celsius’s real use account was much lower than what the company claimed, with the actual user count being closer to 300,000 and being only 1.7 million because of all the fake accounts that were inflating the figure. Obviously, that is not very transparent.
Furthermore, Timothy told Coindesk that Celsius was allegedly manipulating cell prices to the upside, presumably when executives like CEO Alex Mashinsky wanted to cash out, and to the downside, when the company was attempting to reduce employee bonuses, which were, of course, paid in CEL.
It sounds like these bonuses were pretty significant because Timothy stated that he had received a bonus in CEL tokens, which he had swapped for ETH, and later had to pay back a portion of his bonus to Celsius for unspecified reasons. This seemingly small portion was worth close to a million dollars.
Now this might have something to do with the fact that the average Celsius employee was apparently making $30,000 per month based on the company’s bankruptcy filing. As if that wasn’t crazy enough, Celsius is also estimated to have spent $350 million buying back and burning CEL about the same amount that it’s estimated to have lost through leveraged trading with its users’ crypto.
Another former Celsius employee told CNBC that the company was not conducting background checks on new hires and that she was explicitly told not to run a background check on Celsius’s former chief financial officer, who was subsequently arrested for connections to money laundering in Israel. She also echoed Timothy’s opinion that the company was not corrupt but simply growing too quickly and noted that Celsius employees had their money stuck on the platform too. This is why it’s important to keep any cryptocurrency you’re not actively selling or trading in your own personal crypto wallet.
First Bankruptcy Hearing
By this point, what everyone was waiting for was what Celsius’s next step would be, and this was revealed during Celsius’s first bankruptcy hearing, which took place on the 18th of July. Unfortunately, any video audio or transcript of the first hearing is unavailable because it’s illegal to record court proceedings like this in the United States. Fortunately, it’s possible to watch Celsius’s bankruptcy hearings in real time remotely via Zoom as they happen, and many Celsius users provided summaries of what went down during the first hearing.
The tip of the spear in this regard has been Simon Dixon, a longtime crypto holder, investor, author and founder of Bank to the Future, a crypto focused investment platform. Shortly after Celsius’s first bankruptcy hearing, Simon organized a twitter chat with other Celsius users and stakeholders to discuss what went down.
First and foremost, it’s possible that U.S regulators could crack down on the CEL token due to how it was being used by Celsius. As I mentioned earlier, however, the fact that the CEL ICO wasn’t available to retail investors in the US and wasn’t available on US exchanges leads me to believe that this probably won’t happen.
Second, the judge presiding over the bankruptcy case is apparently upset with Celsius’s lack of transparency, which, given the circumstances, is completely understandable.
Third, it appears that Celsius was holding some of its users’ assets in corporate wallets, which is a big no-no according to US regulators.
Fourth, Celsius intends to use its crypto mining operations to dig itself out of the hole (pun intended).
Fifth, a committee consisting of seven to nine Celsius users and stakeholders who were the most affected will be put together and they will have a say in Celsius’s recovery plan.
According to my understanding, some of these users and stakeholders want Alex Mashinsky to continue as CEO. Speaking of Alex, the sixth takeaway is that his claims that Celsius was making most of its money from lending crypto to institutions were revealed to be false, with the platform only lending out around $93 million of crypto to institutions. Though it’s not clear where this figure is from,
Seventh, Alex will likely be forced to resign within the next few weeks because of how exaggerated his claims about Celsius were, claims which at some points were in direct contradiction to Celsius’s own terms and conditions. It’s possible he could be hit with criminal charges afterwards as well.
Finally, Celsius’s lawyers emphasized that social media rumors were the primary factor that caused the run on the crypto platform, and it’s not entirely clear whether the company will go after any specific people to try and prove that point. Additional information about what went down during Celsius’s first hearing can be found in an interview Simon did with fellow crypto youtuber James from Invest Answers.
The TLDR there is that it’s likely the people who are chosen to be a part of the committee will put their interests first over those of the broader community, meaning the average Celsius user may find themselves at the back of the queue for whatever recovery plan is proposed. That said, Simon believes there are three possible outcomes:
- a settlement between Celsius and its users, which is unlikely.
- Celsius simply waits until the crypto market recovers to become solvent again, which is unlikely,
- users who want to cash out will be able to, and those who want a stake in whatever Celsius becomes will get a stake.
It goes without saying that the third option is preferable. If I understand correctly, Simon wants to work with other Celsius whales to restart the company from scratch once all is said and done, and do it the right way, starting with BTC only. To help the Celsius community through these trying times, Simon created a telegram group about Celsius’s bankruptcy.
What Comes Next?
If you’re wondering what comes next, the answer is quite a bit. As I mentioned a few moments ago, Celsius is planning to use its crypto mining operations to recoup its losses and pay back its users. There are just two problems with that plan.
First, it apparently needs five million dollars more to get its mining operations up and running; money that it needs to pay for things like import fees and other such expenses, and money that it’s not likely to get. Second, and more importantly, crypto mining requires a lot of investment and lots of cash flow, and Celsius has neither of the two because it’s literally bankrupt. Never mind the fact that if the crypto market continues to crash, then crypto mining could become unprofitable.
The capital intensity of crypto mining is something that Simon Dixon pointed out and why he believes it’s more likely that the committee of creditors will push the company to go down a different route. This ties in to the second hearing, which is scheduled to take place on Monday the 8th of August, and whereas the first hearing focused on Celsius, the company, the second hearing will focus on Celsius the community.
By that point, the Celsius creditor committee will be set up and they will give their side of the story. Based on the aforementioned twitter spaces, Celsius’s creditors will likely say they were misled by the company and demand full transparency, even down to specific cryptocurrency transactions.
Based on this Chapter 11 bankruptcy timeline from xClaim, Celsius will then have up to six months to present a detailed recovery plan to the creditor committee, after which the company and the committee will go back and forth for up to another six months once both parties have come to an agreement.
In the months that follow, the plan has been approved by the court, and Celsius users should start to get some of their crypto back in the months that follow, but the infographic notes that repayments could take as long as two years to complete.
All in all, it could take up to four years before all Celsius users get some, or hopefully all, of their crypto back. But I must stress that this is on the longer end. If everything goes smoothly, Cassius’s bankruptcy case could be resolved and repayments could be made in as little as two years, which is still quite a while. It’s possible that the recovery plan put forward by the committee includes some way for Celsius users to exit early in exchange for cash, likely at a discount.
Not only that, but it’s possible that an institutional investor of some kind will come along and offer to buy the claims the Celsius users have on their locked crypto, likely at an even bigger discount. If you ask me, this second possibility is more likely to happen, as we’ve already seen FTX offer an early exit to Voyager Digital’s users following its bankruptcy, but let’s just say the terms and conditions for that deal were less than ideal.
In sum, there is a long road ahead for Celsius and its users, but so long as both parties continue to cooperate, the road will be a lot shorter and a lot less painful.
[This article is a transcription of a video made by Coin Bureau]
[Original video: https://youtu.be/tBAaiIZPeqU]