The bankruptcy filing by Celsius this week came as no surprise to anyone. When a platform freezes customer assets, they are usually lost forever. Even though the fall of this embattled crypto lender wasn’t a surprise, it wasn’t less significant.
As of October 2021, the company CEO stated that their company had amassed assets worth $25 billion. At the end of May, even in spite of the sharp decline in cryptocurrency prices, the bank was holding more than $11.8 billion in assets, according to their website. The company also had another $8 billion in crypto loans from clients, earning it a spot among the world’s largest crypto lenders.
Celsius now has $167 million in cash on hand, which it says will be sufficient to support operations during the restructuring process.
In the meantime, Celsius owes its users about $4.7 billion, according to its bankruptcy filing, and there is a hole in the balance sheet of about $1.2 billion.
As a result of all this leverage, you can’t keep the party going the moment you suck out all that liquidity.
Today marks the third major bankruptcy in the crypto world in two weeks. It is being compared to the downfall of a major bank that marks the downfall of Lehman Brothers. The danger of this spread and how to measure it.
Even if the Celsius implosion doesn’t herald a broader crash of the crypto sector, it does indicate the days of huge returns for crypto investors are behind us. As a means to attract new customers, Celsius promised big yields to entice them. This led to the company’s downfall.
“They were subsidizing it and taking losses to get clients in the door,” told by Nic Carter, Castle Island Venture’s. “The yields on the other end were fake and subsidized. Basically, they were pulling through returns from [Ponzi schemes].”
Will people get their money back?
A few days before a well-known crypto lender’s filing for bankruptcy protection, their advertising material promised annual returns of almost 19% a week.
“Transfer your crypto to Celsius and you could be earning up to 18.63% APY in minutes,” the website stated on July 3.
These kinds of promises attracted many new customers to the site. Celsius has a little more than 1.7 million registered users, as of June.
Celsius is also reported to have more than 100,000 creditors, some of whom provided cash to the company without any collateral. Sam Bankman-Fried’s trading firm Alameda Research, as well as an investment firm based in the Cayman Islands, are among its top 50 unsecured creditors.
More so than anyone else, those creditors are going to be the first to recover their lost money—if any is available.
As soon as Celsius filed for bankruptcy, it clarified that “most account activity will be paused until further notice” and that it was “not requesting authority to allow customer withdrawals at this time.”
Under Chapter 11, there are pauses in the way rewards are accrued, so customers will not be receiving reward distributions until bankruptcy is over.
As such, any customers attempting to withdraw their cash are not likely to have any luck just yet. Customers may never be able to recover their losses through bankruptcy proceedings as well. At the end of what may be a lengthy process, there may be a financial reward–but also who may receive it.
There are no formal safeguards in place for customers’ funds, unlike traditional banking, which insures deposits.
Any digital asset transferred by the user to Celsius constitutes a loan. Celsius specifies this in its terms and conditions. A customer’s funds were essentially just unsecured loans to Celsius since Celsius did not put up collateral.
Also, it is clearly mentioned in Celsius’ terms and conditions as a warning that if the company goes bankrupt, “any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable” and that customers “may not have any legal remedies or rights in connection with Celsius’ obligations.”
Additionally, Voyager Digital is popular with retail investors, who have a chance of getting higher yields with 3.5 million clients. Recently, the company filed for bankruptcy.
The CEO of Voyager, in an attempt to alleviate the anxiety of their millions of users, tweeted that after they undergo bankruptcy proceedings, those with crypto in their account will be eligible for a combo of all their coins and whatever they manage to collect in whatever Voyager happens to earn after this entire mess.
We’re unsure of what Voyager tokens will actually be worth, or whether all of this will turn out as planned.
The latest major crypto player to go into bankruptcy proceedings in a U.S. federal courtroom is Three Arrows Capital. These recent proceedings have given rise to the question What’s next? Is bankruptcy court the place to make new precedent in the crypto sector and set it by ruling?
The Capitol Hill legislature is already seeking to establish more ground rules.
Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo), want to clarify the regulatory framework of the crypto industry and divvy up oversight among regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission.
So, What could go wrong?
One major issue for Celsius was that its advertised APY of 20% was not accurate.
One lawsuit accuses Celsius of operating a Ponzi scheme, which gives away early deposit money to newcomers.
As part of its business model, Celsius also invested its funds on other platforms that offered similar sky-high returns.
Celsius was reported to have invested at least half a billion dollars in Anchor, the flagship lending platform of the now-failed U.S. dollar-linked stablecoin terraUSD (UST). Investors expected to be guaranteed a 20% annual return from their investments. Many financial analysts argued that this rate was unsustainable.
Celsius is one of many Anchor partners, and the main reason for the speedy and dramatic failure following the U.S. Trade Unions Project was the considerable share it held in the account.
Nik Bhatia, the founder of The Bitcoin Layer and adjunct professor at USC said that “They always have to source yield, so they move the assets around into risky instruments that are impossible to hedge,”
Its $1.2 billion balance sheet gap is attributed to poor risk models and the fact that collateral was sold out from under it by institutional lenders, according to Bhatia.
“They probably lost customer deposits in UST,” Bhatia further said. “When the assets go down in price, that’s how you get a ‘hole.’ The liability remains, so again, poor risk models.”
Celsius is not the only one. Loopholes are emerging in the lending segment of the crypto market. As a result of all of this, Castle Island Venture’s Carter says, credit is being destroyed and withdrawn, underwriting standards tightened, and solvency was tested, so crypto lenders are withdrawing liquidity.
“This has the effect of driving up yields, as credit gets more scarce,” said Carter, who noted that this has already begun to occur.
Carter forecasts a general deleveraging of the U.S. and other developed economies, which Carter says only strengthens the case for stablecoins, as relatively hard money, and for bitcoin, as truly hard money.
“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.”
