New Jersey crypto lender Celsius Network recently filed for Chapter XI bankruptcy protection over a month after adverse conditions prompted it to stop customer withdrawals.
According to court filings, Celsius’ balance sheet shows a deficit of at least $1.2 billion. The company also has around $5.5 billion in liabilities, of which $4.7 billion are in customer holdings, but only $4.3 billion in total assets.
Also, while Celsius has already begun paying off its debts to institutional creditors, it has yet to deal with its retail investors, who are expected to bear the bulk of the burden.
Celsius’ fall from grace is just the most recent bit of bad news for the cryptocurrency sector. It came in just over a week after online brokerage firm Voyager Digital filed its own Chapter 11 bankruptcy following the downfall of Three Arrows Capital, a Singaporean crypto hedge fund firm.
Daniel Gwen, business restructuring associate at the New York law firm Ropes & Grey, remarked that Celsius’ Chapter 11 filing would bring it into conflict with both institutional creditors and customers alike.
Gwen pointed out that the company’s customers became unsecured creditors when they transferred the ownership of their crypto assets to Celsius. It’s a detail that has misled customers into thinking that Celsius’ framework is practically the same as that of a conventional bank.
For his part, lawyer David Silver of Florida firm Silver Miller concurred with Gwen’s sentiments, pointing out that Celsius’ current issue is what happens when the crypto marketplace remains unregulated. Customers assume they’re putting their money in low-risk investments, only to lose considerably over time. Silver added that the Celsius bankruptcy would lead to increased wariness among potential investors in the near future.
No, It’s Not a Bank
Legal experts point out that crypto-handling institutions like Celsius and Voyager Digital tried to operate themselves using a structure used by banks. However, as neither is subject to the strict regulations governing the conventional banking system, this eventually led to their respective downfalls.
In this case, Chapter 11 bankruptcy protection applies. Referred to by experts as reorganization bankruptcy, filing for Chapter 11 enables these businesses to continue their operations even as they restructure their finances to pay off existing debts – the sole alternative to liquidation due to bankruptcy.
However, Rick Hyman, a partner at Crowell & Moring’s corporate and financial services groups in New York, feels that the US Securities and Exchange Commission needs to determine whether digital assets fall under the category of either securities or commodities. Hyman added that since no distinctions have been made, cryptocurrency platforms cannot be classified as broker-dealers.
