Bankruptcies are linked in crypto. Celsius, a decentralized finance platform, announced on July 13, 2022 that it had filed for bankruptcy. The start-up ensures this allows it and its customers to benefit from the protections promised by Chapter 11 which governs this status. On the occasion of this bankruptcy filing, Celsius asked that the employees be paid and their benefits maintained.
Suspension of operations in June
A liquidity court, Celsius had suspended operations (transfers, withdrawals, exchanges) on its platform in mid-June. “Without a suspension, accelerating withdrawals would have allowed some customers – the first to respond – to be paid in full while leaving other customers to wait for Celsius to recoup value from illiquid or long-lived asset deployment activities. terms before being paid”, explains today the courtier in crypto-assets. Bankruptcy is logically the next step.
The idea is to “stabilize the business, complete a comprehensive restructuring transaction that maximizes value for all parties involved, and emerge from Chapter 11 well-positioned for success in the cryptocurrency industry”says Celsius who seems confident in its future.
$167 million in cash
However, this is not so obvious. Crypto-asset lenders borrow from other cryptocurrency players and also underwrite dollar claims. In the world of decentralized finance, loans are “collateralized” in cryptocurrency, for example in Bitcoin. If the price of Bitcoin drops, the borrower must deposit new bitcoins, as L’Usine Digitale explains. The whole system is based on the participation of more and more actors in this economy, otherwise it seizes up.
Celsius is one of the biggest cryptocurrency lenders out there. As of May, it says it manages about $11.8 billion in assets under management. Celsius also had an additional $8 billion in customer loans, according to CNBC. Today, the startup says it has $167 million in cash, which is enough to “to support certain operations during the restructuring process.”
Celsius claims 1.7 million customers, offering significant promises of returns. Customers who can no longer touch their assets. The platform owes its users about $4.7 billion, according to its bankruptcy filing seen by CNBC and there is a hole of about $1.2 billion in its balance sheet. And unlike the traditional banking system, which typically insures customer deposits, there is no formal consumer protection in this crypto-asset industry.
A Ponzi scheme?
Above all, Celisus is accused of having promised extraordinary returns to its customers and of paying the first depositors with the money obtained from new users. This Ponzi scheme is highlighted in a lawsuit filed against Celsius, as CNBC reports. In parallel, the start-up has also invested its funds in other platforms offering equally high returns to keep its business model afloat. Celsius had invested at least $500 million in Anchor. This lending platform is the one used for the stablecoin UST, a cryptocurrency project pegged to the US dollar which collapsed in value last May.
Celsius’ fall marks the crypto ecosystem’s third major bankruptcy in two weeks. Voyager Digital, which has 3.5 million customers, also filed for bankruptcy in the wake of the compulsory liquidation of Three Arrows Capital (3AC) which failed to repay it the equivalent of $673 million in loans in cryptocurrencies. It is difficult to predict where these bankruptcies will end, but it seems likely that other platforms will be offered.