Crypto lending behemoth Celsius files for bankruptcy

A month to the day after freezing customer accounts, embattled cryptocurrency lender Celsius – which has strong ties to Tampa – filed for Chapter 11 bankruptcy.

Celsius Network made the announcement in a Wednesday night press release, stating the voluntary Chapter 11 proceedings would “provide the company with the opportunity to stabilize its business and consummate a comprehensive restructuring transaction that maximizes value for all stakeholders.”

The Hoboken, New Jersey-based lender filed for bankruptcy in the Southern District of New York, becoming the third high-profile crypto firm to initiate Chapter 11 proceedings in the last two weeks.

“This is the right decision for our community and our company,” said Alex Machinsky, co-founder and CEO of Celsius, in a statement. “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.”

According to the release, Celsius maintains $167 million in cash to fund operations during restructuring, as it hopes to avoid liquidating the company. In the court filing, the lender estimated it holds between $1 billion to $10 billion in assets and matching liabilities on its balance sheet, with over 100,000 creditors.

A spokesperson for Celsius has not responded to requests for comment since the June 13 announcement that it was suspending withdrawals from its platform.

The company has spent the last month desperately trying to stay solvent by paying off creditors while leaving customers whose funds were locked on the platform in limbo. Earlier Wednesday, Coindesk reported that Celsius paid off the money it owed to DeFi (decentralized finance) lending protocol Compound, which freed up nearly $200 million in pledged collateral.

In just the first two weeks of July, Celsius paid back $223 million to DeFi protocol Maker, $235 million to Aave and $258 million to Compound. Coindesk said those payments resulted in the lender reclaiming over $1 billion in digital assets previously stuck in the protocols as collateral.

Celsius boomed during the pandemic as the crypto market soared, and the lender lured depositors with interest rates as high as 18% on their crypto deposits. The platform’s slogan is “unbank yourself,” a proposition made more enticing with returns and access to loans rarely offered by traditional banks.

In May 2021, Nuke Goldstein, a co-founder of Celsius, moved to Tampa and became enamored with the region’s potential as a burgeoning tech and blockchain hub. The platform opened a Tampa office in September 2021, and Goldstein announced plans for Celsius to hire 100 employees for its downtown location.

Nuke Goldstein, a co-founder of Celsius, moved to Tampa in May 2021. Celsius opened a Tampa office in September 2021. Screengrab.

Last November, Decrypt reported that Celsius reached a valuation of $3.5 billion after raising $750 million in a Series B funding round. Around the same time, the company sponsored the Florida Bitcoin & Blockchain Summit at Amalie Arena.

However, following incredibly risky and potentially fraudulent trading practices alleged in a recent lawsuit – and with the precipitous cryptocurrency market downturn that saw bitcoin hitting its lowest levels since late 2020 – Celsius faced a liquidity crisis.

When the company announced it was freezing withdrawals on June 13, it said the move would “put Celsius in a better position to honor, over time, its withdrawal obligations.” The platform had over $12 billion in assets under management in May, down from over $20 billion earlier this year.

Several state securities regulators subsequently launched investigations into the firm’s trading activities.

Now that the company is essentially admitting it does not have enough money to continue covering its debts to creditors, where does that leave the 1.7 million people that, according to its website, “call Celsius home for their crypto?”

The platform’s terms of use do not guarantee that user deposits are safe through insolvency. Furthermore, the fine print states that customers using the company’s “Earn” accounts – which offer astronomically-high interest rates – grant Celsius ownership of the digital assets.

According to the terms of use, funds in Earn accounts “may not be recoverable” in the event of bankruptcy.

Depositors utilizing the platform’s “Custody” accounts – which do not earn interest – retain ownership of their digital assets. However, Celsius still does not guarantee that users can reclaim those funds through bankruptcy proceedings.

Following Wednesday night’s announcement, many customers took to social media to voice their dismay at potentially losing their money while Celsius paid back debts to DeFi services.

“About three months ago, I deposited my life savings to Celsius in order to earn yield while waiting to find a nice apartment to buy for myself,” read one post on the Celsius Network subreddit. “I’ve been working for this money since I was 16, now I’ve lost it all.

“My life is ruined, and I will never be the same person after this.”

In the press release, members of the company’s board of directors stated that, “without the 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 … ”

According to the announcement, Celsius filed a series of customary motions that will allow the company to continue operation – including a request to pay employees and continue providing benefits without disruption. However, customers will have to wait through the Chapter 11 process before they have any hope of withdrawing their funds.

“Celsius is not requesting authority to allow customer withdrawals at this time,” read the release.

Georgetown law professor Adam Levitin told CNBC that Celsius customers may have to wait years to get their money back, and even then, they may receive just pennies on the dollar. It remains unclear what effect the bankruptcy proceedings will have on the Tampa office.