Celsius Filed a Bankruptcy Claim in New York

2022-07-27, 09:57

[TL; DR]
Celsius filed a bankruptcy claim in New York, United States.
The company aims to restructure its operations to raise funds to repay all its outstanding debts.
Chapter 11 enables a company to continue with its business operations while making payments to its creditors.
The collapse of TerraUSD (UST), the Covid-19 pandemic and the increase in the Federal Funds rate contributed to Celsius’ financial problems.
Keywords: Celsius, Bankruptcy, Chapter 11, Cel Token, TerraUSD, LUNA, cryptocurrency, lending

Introduction
Celsius, a leading crypto lending platform, has filed a claim for bankruptcy protection in the United States Bankruptcy Court in New York. The company, through the application for Chapter 11 bankruptcy, declared a 1.2 billion hole in the balance sheet. It applied to continue with its normal operations so it pays its employees and creditors, in terms established through Chapter 11. It will also continue restructuring to meet its obligations to involved parties. In the meantime, the company said it has $167 million in cash to sustain its operations.

Celsius is not requesting an order to enable customers to withdraw their cryptocurrencies but to ensure the entity remains a going concern. The reason for its Chapter 11 application is its dire financial situation, caused by several factors. However, the current micro and macro factors have resulted in its liquidity problems.

Celsius explained its main motive of seeking short term relief from some of its obligations. It stated, “Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps and transfers on its platform to stabilize its business and protect its customers. Without a pause, the acceleration of withdrawals would have allowed certain customers – those who were first to act – to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery." Meanwhile its legal counsel is Kirkland & Ellis LLP, its financial advisor is Centerview Partners while its restructuring advisor is Alvarez & Marsal.

Source: Reuters

Provisions of Chapter 11

It is important to understand the implications of Chapter 11 bankruptcy. Chapter 11 enables the company to operate while paying out its debts according to the conditions established through this piece of legislation. However, the creditors should approve the payment plan.

Celsius Background

Alex Mashinsky, S. Daniel Leon, and Nuke Goldstein founded Celsius in 2017.The business model involves people transferring their cryptocurrencies to Celsius and earning rewards for that. In return, Celsius lends the cryptocurrencies to other people or institutions.Like wise, users who contribute their cryptocurrencies can take loans with their contributions becoming collateral.
From the time Celsius started operations it has grown significantly. Currently, it has approximately 1.7 million users. In addition, it has issued several billions of dollars in loans to individuals and institutions. With this growth trajectory, Celsius introduced its cryptocurrency, Cel Token (CEL), intended to be a utility token for the platform. The token played a crucial role in raising funds for the platform through an initial coin offering (ICO). Moreover, Celsius launched its mobile application in June 2018 which further enhanced its growth. Apart from Celsius’ business we have discussed above, it also runs a bitcoin mining subsidiary, called Celsius Mining.

Source: IndependentUK

The circumstances leading to the bankruptcy

Different factors and circumstances resulted in Celsius’ bankruptcy. Basically, Celsius incurred various losses during the course of its operation in 2018. First, in 2021 StakeHound, an ETH staking platform claimed that it lost its private key for 38 000 ETH. Sadly, 35 000 of this amount belonged to Celsius. Although there is a legal process to recover this amount, it is still outstanding.

In October 2019, Celsius took a collateralized loan from a lending institution, which has not been mentioned by name. However, in July 2021 when Celsius intended to repay the loan to reclaim its collateral, the lending firm said that it was unable to return the amount at once. It promised to make period payments over several years. By July 2021, there was an outstanding amount of $509 million. Nevertheless, the said lending institution has made several repayments over the years, yet there is still an outstanding amount.

The Covid-19 pandemic also brought its challenges on Celsius and many other crypto projects. The pandemic caused panic among investors as it resulted in less business growth. In the end, many investors made withdrawals from DeFi projects and lending institutions such as Celsius.

The Ukraine-Russian war also made things difficult in the crypto sector. Generally, the war has significant negative effects on the global economy. For example, there has been a serious rise in prices of many commodities on the international market.

The economic situation in the United States also impacted on the cryptocurrency market. In 2021, the country increased the Federal funds rate thereby tightening its money supply. Again, this year the United States increased the Federal fund rate, a factor which contributed to less demand for bitcoin and other cryptocurrencies. This also led to a massive sell-off of cryptocurrencies, thus further depressing the struggling market. For instance, the crypto market lost about $2 billion market capitalization. Due to these developments, most top cryptocurrencies experienced sharp price decreases, up to approximately 90% of their all-time-highs.

Source: CNBC

The Terra Luna debacle increased Celsius liquidity woes. The depegging of TerraUSD (UST) had far reaching consequences on the crypto sector. As a fact, the UST and LUNA had a total loss of over $50 billion, affecting most crypto projects. This shook the trust and confidence of crypto holders and investors, as many people would never have imagined such a scenario. As a result, many Celsius users opted to withdraw their cryptocurrencies from the platform. Nonetheless, Celsius failed to meet the withdrawal demands of its users. And to put the situation under control Celsius stopped all withdrawals, swaps and transfers of cryptocurrencies.

The collapse of LUNA and UST created loss for Three Arrows Capital (“3AC”) leading to its liquidation. This resulted in 3AC failing to repay a $75 million loan to Celsius. Although Celsius liquidated 3AC collateral, there was an outstanding amount of $40, 6 million. It is at the backdrop of such economic situations that Celsius filed a claim of bankruptcy protection.

Conclusion

In summary, Celsius filed a claim for bankruptcy protection in a Bankruptcy Court in New York. By doing this, the company aims to restructure its operations in order to make payments to its employees and creditors. If the court approves the application and a creditor repayment plan is agreed upon, Celsius will continue in business while honoring its financial obligations to all parties involved. There were various circumstances that led to Celsius financial woes. These include the global economic meltdown initiated by the Covid-19 pandemic, the Collapse of TerraUSD, the increase in the Federal funds rate and several others.

Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.

Поділіться