WASHINGTON/LONDON (Reuters) – Customers of crypto lender Celsius will have to wait a long time to find out how, when, or even if they will get their money back. The company filed for bankruptcy, making it one of the biggest victims of the collapse in crypto markets this year.
Celsius froze withdrawals in June because of how bad the market was. This move sent shockwaves through the crypto world and beyond, leading to a $300 billion selloff of digital assets and cutting off millions of small investors from their savings.
Celsius Network, which is based in the U.S. state of New Jersey, filed for Chapter 11 bankruptcy in New York this week. When it did, it showed that it had a huge $1.2 billion hole in its balance sheet.
Six lawyers who specialise in bankruptcies, restructuring, or crypto told Reuters that customers should now get ready for a bumpy ride while they wait to find out what will happen to their money.
Lawyers said that the Chapter 11 process is likely to be slow because there aren’t many examples of big crypto companies going bankrupt, Celsius could face multiple lawsuits, and any restructuring would be very complicated.
Daniel Gwen of the Ropes & Grey law firm in New York said, “This could go on for years.” “It’s very likely that there will be a lot of court cases.”
Celsius did not reply to requests for comment.
During the pandemic, there was a lot of growth in the number of crypto lenders. These lenders offered double-digit interest rates, which are rarely offered by traditional banks, in exchange for deposits of crypto assets.
On the other hand, institutional investors like hedge funds paid higher interest rates to lenders to borrow the coins, which made firms like Celsius money. Lenders also put money into so-called decentralised finance markets, which are riskier.
“THREE-DIMENSION CHESS”
When crypto markets fell this year because of rising inflation rates and the failure of two major tokens, terraUSD and luna, lenders who had made riskier bets on wholesale crypto markets lost.
This month, Voyager Digital, a crypto lender in the U.S., also filed for bankruptcy after stopping withdrawals and deposits. Vauld, a smaller crypto lender in Singapore, and Babel Finance, based in Hong Kong, have also stopped withdrawals.
Chapter 11 bankruptcy lets companies keep running while they work on plans to turn things around.
Even though big crypto firms have failed before, like the Japanese exchange Mt. Gox in 2014, the lawyers said there isn’t much of a model for how to treat customers of failing crypto lenders.
James Van Horn, a partner at Barnes & Thornburg in Washington, said, “At best, we don’t know how the bankruptcy code and bankruptcy courts will treat cryptocurrency companies.”
Three lawyers said that creditor committees set up as part of the bankruptcy process are likely to try to shape any reorganisation plan chosen by Celsius. Creditors can also file claims against the company while it is going through the process.
Stephen Gannon, a partner at Davis Wright Tremaine, said, “Given how complicated it is, it will likely take at least six months to come up with a plan to get out of bankruptcy.” “This will be chess in three dimensions.”
In most Chapter 11 bankruptcies, secured creditors get paid first, followed by unsecured creditors, and finally equity holders.
“(Unsecured creditors) don’t have any specific rights to funds or anything else because everything has been mixed together,” Van Horn said. “Sometimes, unsecured creditors only get a very small amount.”
‘LAST ON THE LIST’
This week, Celsius told the court that it owed money to more than 100,000 people.
In a filing on Thursday, it said that as of July 13, it had given out 23,000 loans to retail borrowers totaling $411 million. These loans were backed by crypto collateral worth $766 million.
Even though Celsius listed its 50 biggest creditors, it didn’t say how they would be paid back, and many of its 1.7 million customers are individual investors.
Martin Jabou, who is 27 and lives in Canada’s Hamilton, is one of them. He put about $45,000 worth of crypto assets into Celsius, but those assets are now worth less than half of what they were.
“I think we’ll be at the bottom of the list,” he said, referring to any payments that might come out of the bankruptcy. “I don’t know how I’ll be able to pay my rent or car payment with all the other debts I have.”
Like banks, crypto lenders like Celsius worked in the same way. But when crypto platforms fail, there is no safety net for people like Jabou, which is not the case for traditional lenders.
A federal agency covers deposits of up to $250,000 in U.S. banks. A separate body insures clients of broker-dealers for up to $500,000 in securities and cash.
Both the European Union and Britain have deposit protection plans that are similar to this one.
Even though it’s not clear how Celsius will classify its clients, it did warn them that it might treat them as unsecured creditors. Max Dilendorf, a lawyer in New York who specialises in crypto, said that customers are likely to sue over such a status.
He said, “It will be a unique case to show why customers should be considered unsecured creditors.”