Shortly afterward, the company confirmed the news, saying that it had “filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York.” The state is home to several of the company’s executives.
Crypto’s frozen mystery: The fate of billions in Celsius deposits
Celsius said it would “continue to operate,” noting it has “$167 million in cash on hand, which will provide ample liquidity to support certain operations during the restructuring process” but said that it “was not requesting authority to allow customer withdrawals at this time. Customer claims will be addressed through the Chapter 11 process,” it added.
The move jettisons hopes that a large number of depositors will be made whole — most retail investors are considered unsecured creditors in a bankruptcy and thus at low priority to be repaid.
Celsius is believed to have more than 500,000 depositors. Among its unsecured creditors, it said in its petition, were an investment firm based in the Cayman Islands, to which it owes nearly $300 million, a digital marketing firm owed more than $13 million, and a digital trading firm to which it owes $12.7 million.
An email sent to the company’s press account requesting comment was not returned Wednesday night, but a separate request to the company’s public relations agency, C Street Advisory Group, brought a “no comment” response.
For several years, Celsius was a crypto golden child under co-founder Alex Mashinsky, offering more than 20 percent yields under what he and other executives said was a disruptive plan that avoided the fees and greed of traditional banks. The company elicited some skepticism, with doubters asking how it was able to manage such high returns without taking untenable risks. But it also generated many fans, and depositors poured in.
The company froze deposits on June 12, saying, “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals.” The “market conditions” alluded to falling cryptocurrency values as well as the crash of Terra, a company with a stablecoin and token that had swiftly lost nearly all its value over just a several-day span in May.
But Celsius also said that it was “taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.”
The crypto-skeptics’ voices are getting louder
A week later, the company posted updates on its site intimating that an unfreezing and resumption of business was possible. “We want our community to know that our objective continues to be stabilizing our liquidity and operations. This process will take time,” it wrote on June 19.
Many of the depositors had hoped that a white knight could help Celsius get on surer footing. “At the moment I still believe Alex and the team at Celsius are figuring out ways to allow withdrawals at a certain point in time,” said one depositor named Alan who spoke to The Washington Post last month.
He and others held on to hope as FTX chief Sam Bankman-Fried poured money and credit into other embattled crypto lenders.
But as the weeks wore on, a bailout and unfreezing appeared less likely. Skeptics redoubled their criticism of Celsius, including its decision to tie up a lot of its money in a potentially profitable but illiquid plan called “staking” currency as well as investment in a platform called BadgerDao that had suffered a major hack. They also noted the interdependency of the crypto world, with many borrowing from and lending to one another, increasing exposure in a crash.
Last week, Jason Stone, a decentralized-finance player who had been among those managing deposits for Celsius, sued the company, saying that Celsius not only took undue risks but also manipulated markets. The suit alleged that executives “were, in fact, operating a Ponzi-scheme.”
Several days ago, Celsius replaced its legal team with an eye toward a bankruptcy filing.
Mashinsky maintained Wednesday that the outlook for Celsius was bright. “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,” he said in the statement.
The company has repaid several hundred millions of dollars in loans to its own lenders in the past two weeks amid its bid to avoid bankruptcy, but it has not made that gesture to its depositors.
In its statement, it also quoted members of “the special committee of the board of directors” saying that the freeze was necessary to level the playing field.
“Without a pause, the acceleration of withdrawals would have allowed certain customers — those who were first to act — to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities.”
State regulators in Texas, Alabama, New Jersey and elsewhere have been working with Celsius lawyers over the past month while investigating the company’s practices. Rotunda said in a message to The Post on Wednesday night that “we will continue to work with attorneys for Celsius Network and we will welcome their cooperation in developing a solution for investors.”
But he added that “our investigation does not begin and end in negotiating with counsel” and that regulators would use “their investigative authority to independently develop evidence and other information relevant to the depository account scheme.”
He said his view of Celsius has not changed since it came across 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 depository accounts and did not disclose important, material information such its assets and liabilities and the risks associated with the scheme,” he said.