According to its bankruptcy filing, Celsius owes its customers roughly $4.7 billion, and its balance sheet has a hole of about $1.2 billion. Let’s take a look inside Celsius’ $25 billion bankruptcy filing.
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This week’s bankruptcy filing by Celsius did not really surprise anyone. Once a platform locks down a customer’s assets, it is usually game over. But just because the collapse of this troubled cryptocurrency lender was not unexpected does not mean it was not a significant event for the sector.
The cryptocurrency lender’s CEO, Alex Mashinsky, said in October 2021 that it was managing $25 billion in assets. According to its website, the lender was in charge of managing around $11.8 billion in assets as recently as May, despite the collapse of cryptocurrency values. The company has an additional $8 billion in client loans, making it one of the most well-known names in cryptocurrency lending globally.
Celsius claims that its remaining $167 million in “cash on hand” will offer “ample liquidity” to continue business operations throughout the restructuring process.
According to its bankruptcy filing (read below), Celsius owes its customers almost $4.7 billion, and its balance sheet has a roughly $1.2 billion hole.
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It just goes to show how powerful a drug leverage is, and how much difficult it is to maintain the high once all the liquidity has been sucked out.
The collapse of Celsius, the third notable bankruptcy in the cryptocurrency ecosystem in the past two weeks, is being dubbed “crypto’s Lehman Brothers moment” because it has the same contagious effects as the collapse of a significant Wall Street bank, which ultimately signaled the 2008 mortgage crisis and financial crisis.
The days of clients earning double-digit yearly returns have ended, regardless of whether the Celsius crash heralds a bigger collapse of the greater crypto industry. The fact that Celsius made those large yield promises in order to attract new customers is a major factor in its eventual demise.
“They were subsidizing it and taking losses to get clients in the door,” said Castle Island Venture’s Nic Carter. “The yields on the other end were fake and subsidized. Basically, they were pulling through returns from [Ponzi schemes].”
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Who will get their money back
Few days before the cryptocurrency lender eventually sought bankruptcy protection, three weeks after ceasing all withdrawals owing to “extreme market conditions,” Celsius was still touting annual returns of around 19 percent that were paid out weekly on its website in huge, bold print.
On July 3, the website stated, “Transfer your crypto to Celsius and you could be earning up to 18.63% APY in minutes.”
Such assurances aided in quickly luring in new consumers. As of June, Celsius reported having 1.7 million customers.
According to the bankruptcy petition, Celsius has more than 100,000 creditors, some of whom provided funding to the site without any kind of security. Sam Bankman-Fried’s trading firm Alameda Research and a Cayman Islands-based investment firm are among the roster of its top 50 unsecured creditors.
Should there be any money available for the taking, those creditors will probably be first in line to receive it, leaving mom and pop investors holding the bag.
Celsius stated in a statement following the submission of its bankruptcy petition that “most account activity will be paused until further notice” and that it was “not requesting authority to allow customer withdrawals at this time.”
The FAQ goes on to clarify that clients will not be obtaining reward distributions at this time and that reward accruals are also stopped throughout the Chapter 11 bankruptcy procedure.
Customers who are currently attempting to access their crypto currency are unsuccessful. It is also uncertain whether filing for bankruptcy will ever allow for clients to recover their losses. Who would be first in line to receive any payment at the conclusion of what might be a multi-year procedure is another issue.
There are not any official consumer protections in place to protect user funds when things go wrong, unlike the conventional banking system, which normally protects customer deposits.
Any digital asset that is transferred to the platform becomes a loan from the user to Celsius, according to Celsius’ terms and conditions. Customer funds were effectively merely unsecured loans to the platform because Celsius did not put up any collateral.
Additionally, customers “may not have any legal remedies or rights in connection with Celsius’ obligations” and “any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable” are cautioned in the fine print of Celsius’ terms and conditions. If things ever go wrong, the revelation appears to be an attempt to grant everyone general immunity from legal responsibility.
Voyager Digital, a well-known lending platform with 3.5 million customers that targets retail investors with high-yield deals, has also recently declared bankruptcy.
Voyager CEO Stephen Ehrlich tweeted that users with cryptocurrency in their accounts may be qualified for a sort of grab bag of things after the firm runs through bankruptcy proceedings, including a combination of the cryptocurrency in their accounts, common shares in the reorganized Voyager, Voyager tokens, and then whatever proceeds they are able to get from the company’s now-defunct loan to the once-famous crypto hedge fund Three Arrows Capital.
It is uncertain whether or not all of this would work out in the end, as well as how much the Voyager token would be worth.
Three Arrows Capital is the third most significant cryptocurrency player to file for bankruptcy in a federal courtroom in the United States, continuing a pattern that begs the obvious question: Will bankruptcy court eventually serve as the venue where new precedent in the cryptocurrency industry is established, in a sort of regulate-by-ruling model?
On Capitol Hill, lawmakers are already attempting to set more guidelines.
With a bill that outlines a thorough framework for regulating the cryptocurrency industry and distributes oversight among regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission, Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., hope to bring clarity.
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What went wrong
The main issue with Celsius is that the APY of around 20 percent that it was promising users was fake.
In one suit, Celsius is charged with running a Ponzi scheme in which it diverted funds from new customers to pay early depositors.
In order to maintain its business model, Celsius also put money into other sites that offered comparable exorbitant profits.
The primary lending platform of the now-defunct US dollar-pegged stablecoin project terraUSD (UST), Anchor, was discovered to have at least $500 million put in it by Celsius, according to a report from The Block. On their UST assets, Anchor offered investors a 20% annual percentage yield, a figure that many analysts deemed untenable.
The fact that Celsius was one of many platforms that parked their funds with Anchor contributed significantly to the rapid and massive failures that followed the UST project’s collapse in May.
According to Nik Bhatia, founder of The Bitcoin Layer and adjunct professor of finance at the University of Southern California, “They always have to source yield, so they move the assets around into risky instruments that are impossible to hedge.”
Bhatia attributes the $1.2 billion hole in its balance sheet to inadequate risk modeling and the fact that institutional lenders sold the collateral out from under it.
“They probably lost customer deposits in UST,” Bhatia added. “When the assets go down in price, that’s how you get a ‘hole.’ The liability remains, so again, poor risk models.”
It is not just Celsius. In the loan sector of the cryptocurrency industry, cracks continue to appear. According to Carter from Castle Island Venture, the result of all of this is that credit is being destroyed and withheld, underwriting requirements are being tightened, and solvency is being tested, which causes everyone to withdraw liquidity from crypto lenders.
According to Carter, who stated that we are already witnessing this, “this has the effect of driving up yields, as credit gets more scarce.”
Carter anticipates a mass deleveraging caused by inflation in the United States and worldwide, which will only strengthen the argument for bitcoin and stablecoins as truly hard money and moderately hard money, respectively.
“But the portion of the industry that relies on the issuance of frivolous tokens will be forced to change,” he said. “So I expect the result to be heterogeneous across the crypto space, depending on the specific sector.”
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