Clients of crypto-lender Celsius have a long wait for the fate of their funds

Crypto Lender Clients Celsius face a long and anxious wait to find out how, when and even if they will get their money back after the company filed for bankruptcy, one of the biggest victims of the collapse in cryptocurrency markets this year.

Referring to extreme market conditions, Celsius freezes withdrawals in June in a movement that affected crypto world onwards, triggering a sell-off of $300 billion in digital assets and leaving legions of retail investors without their savings.

Celsius Network, based in the U.S. state of New Jersey, found a $1.2 billion gap in its balance sheet when it filed for Chapter 11 bankruptcy this week in New York.

Clients now have to buckle up on a bumpy road as they wait for some clarity on the fate of their money, six lawyers who specialize in bankruptcy, restructuring or crypto told Reuters.

Due to the meager bankruptcies of major crypto companies, the prospect of multiple lawsuits against Celsius, and the high complexity of any restructuring, the Chapter 11 process is likely to be slow, lawyers said.

“It can take years,” said Daniel Gwen of New York law firm Ropes & Gray. “There will probably be a lot of litigation.”

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Celsius did not respond to requests for comment.

Cryptocurrency lenders have prospered during the pandemic, attracting retail clients with double-digit rates rarely offered by traditional banks in exchange for their deposits in crypto assets.

On the other hand, institutional investors like hedge funds paid lenders higher rates to borrow coins, leaving firms like Celsius to profit from the difference. Lenders have also invested in riskier so-called decentralized financial markets.


3D Chess’

When the crypto markets crashed this year as rising inflation prompted a flight to safer assets and two major tokens — terraUSD and luna — crashed, the riskier rates of lenders in wholesale crypto markets soured.

US crypto lender Voyager Digital also filed for bankruptcy this month after suspending withdrawals and deposits, while smaller Singaporean lender Vauld and Hong Kong-based Babel Finance also froze withdrawals.

Chapter 11 bankruptcies allow companies to prepare recovery plans while remaining operational.

While major crypto firms have failed before, most notably Japanese exchange Mt. Gox in 2014, according to lawyers, there is little precedent for dealing with clients from affected crypto lenders.

“At best, it is unknown how the bankruptcy code and bankruptcy courts will treat crypto companies,” said James Van Horn, a partner at Barnes & Thornburg in Washington.

Creditor committees formed as part of the bankruptcy proceedings are likely to seek to shape any reorganization plan adopted by Celsius, the three lawyers said. Lenders can also make claims against a company even when it is going through the process.

“It is likely, given the complexity, that it will take at least six months just to develop a bankruptcy exit plan,” said Stephen Gannon, partner at Davis Wright Tremaine. “It will be three-dimensional chess.”

Generally, under Chapter 11 bankruptcy, priority is given to payments to secured creditors, then to unsecured creditors, and then to equity holders.

“(Unsecured creditors) don’t have vested rights to any funds or anything, it’s all mixed up,” Van Horn said. “Sometimes it’s a very small amount that unsecured lenders get.”

“Last on the List”

This week, Celsius said in court documents that it has more than 100,000 creditors.

As of July 13, it had about 23,000 outstanding loans to retail borrowers worth $411 million, secured by $766 million in cryptocurrencies, according to a filing Thursday.

While Celsius listed its top 50 creditors, it did not mention the order in which they would be repaid, and many of its 1.7 million clients are individual investors.

One of them is 27-year-old Martin Jabu, who lives in Hamilton, Canada. He invested about $45,000 worth of crypto assets in Celsius, although they are now worth less than half that amount.

“I think we’ll be last on the list,” he said of any bankruptcy payouts. “I don’t know how to afford the rent or the car, especially with the other debts I have.”

Cryptocurrency lenders like Celsius have acted similarly to banks. But unlike mainstream lenders, there is no safety net for people like Jabow when crypto platforms fail.

In US banks, deposits up to $250,000 are federally insured. Broker-dealer clients are insured for up to $500,000 in securities and cash by a separate body.

Similar deposit protection schemes exist in the European Union and the UK.

While it’s not clear how Celsius will classify its clients, it has warned clients that it may treat them as unsecured creditors and clients will likely be sued over such status, said Max Dielendorf, a New York-based cryptocurrency lawyer. .

“This will be a one-of-a-kind case to see why clients should be classified as unsecured creditors,” he said.