Crypto Lender Celsius Files for Bankruptcy Protection

Crypto company Celsius has started the process of filing for Chapter 11 bankruptcy protection after a month of chaos.

On Wednesday, Celsius said it would look to stabilize its business by restructuring in a way “that maximizes value for all stakeholders.” Celsius said it has $167 million in cash on hand to support operations in the meantime.

According to CNBC, the company’s lawyers were notifying individual U.S. state regulators as of Wednesday evening, who asked not to be named because the proceedings were private.

“This is the right decision for our community and company,” Alex Mashinsky, co-founder and CEO of Celsius commented.

He added, “I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”

Celsius made headlines a month ago after freezing customer accounts due to extreme market conditions.

Voyager also filed for Chapter 11 bankruptcy protection last week, after suffering losses due to exposure to now defunct hedge fund Three Arrows Capital.

A judge in New York bankruptcy court froze Three Arrows Capital’s remaining assets this week. The fund is now in the process of liquidation proceedings.

“Unfortunately, this was expected. It was anticipated. It does not, however, stop our investigations. We will continue investigating the company and working to protect its clients, even through its insolvency", said Joseph Rotunda, Director of Enforcement at the Texas State Securities Board.

The company has more than 100,000 creditors, which could include both customers and lending counterparties, according to the bankruptcy document. Its largest unsecured claim is an $81 million from Caymans Island-based Pharos Fund. The filing also lists billionaire FTX CEO Sam Bankman-Fried’s trading firm, Alameda Research, as a creditor with a $12 million unsecured loan.

Celsius was one of the largest players in the crypto lending space with more than $8 billion in loans to clients, and almost $12 billion in assets under management as of May. Celsius said it had 1.7 million customers as of June and was competing with its interest-bearing accounts and yields as high as 17%.

The firm would lend customers’ crypto out to counterparties willing to pay a sky-high interest rates to borrow it. Celsius would then split some of that revenue with users. But the structure came crashing down amid a liquidity crunch in the industry.

The company was sued last week by a former investment manager who alleged Celsius failed to hedge risk, artificially inflated the price of its own digital coin, and engaged in activities that amounted to fraud.

Six state regulators have already launched investigations into Celsius. Vermont became the latest to do so earlier on Wednesday. The state’s Department of Financial Regulation said Celsius “deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities.”

“Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,” the Vermont regulator said in a statement.

He added, “The company’s assets and investments are probably inadequate to cover its outstanding obligations.”

Adam Levitin, Georgetown law professor and principal at Gordian Crypto Advisors, said Celsius customers may have to wait years to see their money again and may only be entitled to pennies on the dollar. Customers that took part in Celsius’ high-yield deposit program could be seen as unsecured creditors in the eyes of the court.

Levitin told CNBC, “The treatment here seems to be that the customer’s crypto is actually the company’s property, and as an unsecured creditor, you don’t get your bitcoins back", adding that he doesn’t think Celsius is the last of the crypto bankruptcies.

“The tide is still going out, we’re just waiting to see how far it goes.”