Crypto firm Celsius files for Chapter 11 bankruptcy protection

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On Wednesday evening, struggling crypto lender Celsius Network said it had filed for bankruptcy, dealing another blow to depositors who had spent the past month wondering if they would ever see their money again.

Joe Rotunda, the director of enforcement at the Texas State Securities Board, which is among state regulators investigating Celsius, had said earlier Wednesday that bankruptcy filings “appeared imminent.”

Shortly after, the company confirmed the news, saying it had “filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.” “. The state is home to several company executives.

Crypto’s Frozen Mystery: The Fate of Billions of Celsius Deposits

Celsius said it would “continue to operate”, noting it had “$167 million in cash, which will provide sufficient liquidity to support certain operations during the restructuring process”, but said it ” was not requesting permission to allow customer withdrawals at this stage.” time. Customer complaints will be handled through the Chapter 11 process,” he added.

The move dashes hopes that large numbers of depositors will be reinstated – most retail investors are considered unsecured creditors in a bankruptcy and therefore low priority to repay.

Celsius is said to have over 500,000 depositors. Among its unsecured creditors, it said in its petition, were a Cayman Islands-based investment firm, to which it owed nearly $300 million, a digital marketing firm which owed more than $13 million. dollars and a digital commerce company to which she owes $12.7 million. .

An email sent to the company’s press account requesting comment was not returned Wednesday evening, but a separate request to the company’s public relations agency, C Street Advisory Group, brought a reply “no comment”.

For several years, Celsius was a crypto golden child under co-founder Alex Mashinsky, offering more than 20% returns under what he and other executives called a disruptive plan that avoided fees and greed. traditional banks. The company has been met with some skepticism, with skeptics wondering how it was able to manage such high returns without taking unsustainable risks. But it also generated a lot of fans and depositors flocked.

The company froze deposits on June 12, saying, “Due to extreme market conditions, we are announcing today that Celsius is suspending all withdrawals.” The “market conditions” alluded to plummeting cryptocurrency values ​​as well as the crash of Terra, a company with a stablecoin and token that had rapidly lost almost all of its value in just a few days in May.

But Celsius also said it was “taking this step today to put Celsius in a better position to meet, over time, its withdrawal obligations.”

The voices of crypto-skeptics are getting louder

A week later, the company posted updates on its site hinting that a thaw and a resumption of business were possible. “We want our community to know that our goal continues to stabilize our liquidity and operations. This process will take time,” written on June 19.

Many depositors had hoped that a White Knight could help Celsius get back on their feet. “At this time, I still believe that Alex and the team at Celsius are finding ways to allow withdrawals at some point,” said a filer named Alan who spoke to The Washington Post last month.

He and others kept hope alive as FTX chief Sam Bankman-Fried paid money and credit in other struggling crypto lenders.

But as the weeks went on, a bailout and a thaw appeared less likely. Doubters have stepped up their criticism of Celsius, including its decision to tie up much of its money in a potentially profitable but illiquid scheme called staking currency as well as investing in a platform called BadgerDao which had suffered a major hack. They also noted the interconnectedness of the crypto world, with many borrowing and lending to each other, increasing exposure in the event of a crash.

Last week, Jason Stone, a decentralized finance player who was among those managing Celsius’ deposits, sued the company, say that Celsius not only took undue risks, but also manipulated the markets. The lawsuit alleged that the leaders “were, in effect, operating a Ponzi scheme.”

A few days ago, Celsius replaced its legal team with a view to filing for bankruptcy.

Mashinsky said on Wednesday that the outlook for Celsius was bright. “I am confident that when we look back on the history of Celsius, we will see this as a defining moment, where acting with determination and confidence served the community and strengthened the future of the company,” he said. stated in the press release.

The company has refunded several hundred million dollars in loans to its own lenders over the past two weeks as part of its bid to avoid bankruptcy, but it has made no such gesture to its depositors.

In his statement, he also quoted members of the “special board committee” as saying the freeze was necessary to level the playing field.

“Without a pause, the acceleration of withdrawals would have allowed some customers – those who were the first to act – to be paid in full while leaving others to wait for Celsius to recoup the value of asset deployment activities. illiquid or longer term.”

State regulators in Texas, Alabama, New Jersey and elsewhere have worked with Celsius attorneys over the past month while investigating the company’s practices. Rotunda said in a message to The Post on Wednesday evening that “we will continue to work with Celsius Network’s attorneys and welcome their cooperation in developing a solution for investors.”

But he added that “our investigation does not begin and end with a negotiation with counsel” and that regulators would use “their investigative authority to independently develop evidence and other information relevant to the system.” deposit account”.

He said his views on Celsius haven’t changed since it hit his and other regulators’ radars last year, prompting several states to issue cease and desist letters.

“I stand by our public allegations – that Celsius Network illegally offered the deposit accounts and failed to disclose important and material information such as its assets and liabilities and the risks associated with the scheme,” he said. declared.

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