In June, Celsius stopped allowing withdrawals, citing "extreme market circumstances." This decision sent shockwaves across the cryptocurrency community and beyond, causing a $300 billion selloff in digital assets and cutting off millions of individual investors from their funds.
The New Jersey-based Celsius Network disclosed a massive $1.2 billion hole in its financial sheet this week when it filed for Chapter 11 bankruptcy in New York.
Customers should prepare for a rocky ride while they wait for some clarification over what will happen to their money, according to six attorneys who specialize in bankruptcy, restructuring, or cryptocurrency, who spoke to Reuters.
The Chapter 11 procedure is likely to be drawn out due to the lack of precedence for bankruptcy at significant crypto firms, the possibility of many lawsuits against Celsius, the difficulty of any reorganization, and other factors, according to the attorneys.
At the Ropes & Grey legal office in New York, Daniel Gwen warned that "this might go on for years." There will probably be a lot more litigation, in my opinion.
Requests for comments from Celsius went unanswered
In response to deposits of crypto assets, crypto lenders grew rapidly during the epidemic, luring retail clients with double-digit rates that were uncommon for regular banks to give.
On the other hand, businesses like Celsius profited from the discrepancy since institutional investors like hedge funds paid lenders higher rates to borrow the coins. Lenders also made riskier investments in 'decentralized' financial markets.
"THREE-DIMENSIONAL CHESS"
The riskier bets by lenders on wholesale crypto markets went sour when crypto markets crashed this year as increasing inflation rates triggered a flight to safer assets and two major tokens, terraUSD and luna, collapsed.
This month, smaller Singaporean lenders Vauld and Hong Kong-based Babel Finance also blocked withdrawals, along with American cryptocurrency lender Voyager Digital, which had suspended withdrawals and deposits.
Companies may create turnaround strategies while still operating in Chapter 11 bankruptcy.
Although notable crypto companies have collapsed in the past, most notably the Japanese exchange Mt. Gox in 2014, the handling of clients at troubled crypto lenders lacks precedence, according to the attorneys.
The treatment of cryptocurrency corporations under the bankruptcy law and bankruptcy courts is, at best, uncertain, according to James Van Horn, a partner at Barnes & Thornburg in Washington.
According to three attorneys, creditor committees established as part of bankruptcy proceedings would probably try to influence any reorganization plan chosen by Celsius. Even while the procedure is ongoing, creditors may file claims against the corporation.
Given the intricacy, developing a strategy to leave bankruptcy would likely take at least six months, said lawyer Stephen Gannon, partner at Davis Wright Tremaine. This game of chess will be played in three dimensions.
In general, Chapter 11 bankruptcies give secured creditors, unsecured creditors, and equity holders the highest priority for repayment.
Everything has been mixed, so (unsecured creditors) have no allocated rights to any money or anything else, according to Van Horn. "Unsecured creditors may get a very modest sum."
Being last on the list
This week, Celsius said that company has more than 100,000 creditors in court documents.
According to a filing on Thursday, as of July 13, it has around 23,000 unpaid retail loans totaling $411 million, secured by crypto assets worth $766 million.
Although Celsius revealed its top 50 lenders, it did not specify how they would be paid back, and many of its 1.7 million customers are private investors.
Martin Jabou, a 27-year-old Canadian resident of Hamilton, is one of them. Even while his crypto holdings are now worth less than half of what he invested in Celsius, they were once worth nearly $45,000.
Regarding any bankruptcy-related repayments, he predicted that "we're going to be last on the list." "With all of my other bills, I have no idea how I'm going to pay my rent or auto loan."
Lenders of cryptocurrency, like Celsius, behaved similarly to banks. However, when cryptocurrency platforms fail, there is no safety net for individuals like Jabou, unlike for traditional lenders.
Deposits up to $250,000 at U.S. institutions are covered by a government agency. Clients of broker-dealers are covered by a separate entity for up to $500,000 in cash and securities.
In both the European Union and Great Britain, there are similar deposit protection programs.
While it is unclear how Celsius would categorize its clients, the company did warn consumers that they may be treated as unsecured creditors, and clients are likely to sue over such a classification, according to Max Dilendorf, a New York attorney who specializes in cryptocurrency.
"To show why clients should be categorized as unsecured creditors will be a one-of-a-kind scenario," he added.
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