People have said a lot regarding the ongoing Celsius debacle. Once the blue-eyed darling of the fast-growing crypto lending space, Celsius is now in the red for more than $3 billion and is fighting for its future in a New York bankruptcy court.
Celsius Frozen By Crypto Winter
It all started in June when reports emerged that the company was facing severe liquidity issues. Only hours after Celsius’s much-maligned CEO Alex Mashinsky denied the rumours, the crypto firm moved to freeze withdrawals citing “extreme market conditions.”
Celsius got into trouble after taking out highly leveraged loans from DeFi protocols like Aave and MakerDAO, which became near-impossible to service following a debilitating crypto winter that saw Bitcoin lose more than half its all-time high value.
A month after freezing withdrawals, the company filed for chapter 11 bankruptcy protection, describing it as the right choice to safeguard the company’s fate and serve the Celsius community.
Much has happened since then. Below, we’ll look at some events that have driven the narrative around the once popular crypto lender.
KeyFi Sues Celsius Network
On July 7, asset manager KeyFi, who once managed crypto deposits on behalf of Celsius, sued the crypto company to recoup profit-sharing payments it claims it is owed. The lawsuit made several disturbing allegations against Celsius and its CEO Alex Mashinsky, including accusations that the company defrauded customers by inflating the value of its native CEL token. The KeyFi suit alleged that Mashinsky personally benefited from the overvaluation since he was one of the largest holders of CEL tokens.
KeyFi claimed it had made profits in the hundreds of millions for Celsius since entering a handshake agreement to invest its crypto assets. However, Arkham Intelligence, a crypto research firm that analysed KeyFi’s blockchain data, indicated that KeyFi lost about $350 million worth of crypto deposits placed in its care by Celsius.
Celsius has since countersued KeyFi, accusing the company and its CEO Jason Stone of thievery and incompetence.
Celsius Reveals $1.2 Billion Shortfall
One of the biggest revelations from Celsius’s bankruptcy proceedings was the actual amount for which the company was liable. Documents filed in the Bankruptcy Court of the Southern District of New York indicated that as of July 13, 2022, Celsius held $5.5 billion in liabilities against assets valued at $4.3 billion, down from about $25 billion in October 2021. This meant that the crypto company had a $1.2 billion hole in its balance sheet.
The shortfall would have been even bigger had Celsius not paid off several large loans owed to Compound, MakerDAO, and Aave, which allowed it to reclaim about $1 billion worth of collateral held by the DeFi protocols.
Subsequent court filings have revealed that the situation is much worse than was initially indicated. According to the new documents, Celsius owed customers more than $6.6 billion in crypto against a holding of only $3.3 billion.
Of the funds owed, $2.2 billion is in BTC, of which the crypto lender holds about 14,528 coins valued at about $312 million at current prices. Celsius also holds 23,348 wBTC with a market value of $474 million.
Celsius Community Runs Short Squeeze Campaign
While matters in the courtroom got heated, it soon became apparent that some crypto whales were intent on taking advantage of Celsius’s woes by short-selling the CEL token. However, members of the Celsius community joined together to conduct a short squeeze campaign to counter the whales’ machinations.
The campaigns have been going on in the last couple of months to varying degrees of success. At one point, the short squeeze raised the price of CEL by an eye-watering 4,000%, going from a low of $0.093 to a high of $4.50 in two months.
Customers Plead With Court For Help in Recovering Funds
While some members of the Celsius community fended off hungry whales, others turned to the bankruptcy court for aid. Hundreds wrote letters to the judge overseeing the company’s chapter 11 proceedings, begging him to prioritise them.
The heartwrenching letters, which came from all over the world, spoke of shame, despair, regret, and suicidal thoughts. From Ireland, a farmer dejectedly told the judge he was close to losing his land. In Texas, an octogenarian widow recounted how she lost all her life savings to Celsius. Another woman emailed Celsius CEO Alex Mashinsky with ultrasound pictures of her unborn baby, pleading for her funds to be released so she could use them to pay for its delivery.
Most of the letters accused Alex Mashinsky of using his weekly AMAs to mislead customers into believing that Celsius was a safe and stable platform.
During the second day of the Celsius bankruptcy hearings, Judge Martin Glenn publicly acknowledged receipt of the letters and stated that the court would address some of the issues raised.
U.S. Trustee Appoints Unsecured Creditors Committee
In a bid to protect the interests of Celsius’s creditors, the Office of the U.S. Trustee on July 27 set up an unsecured creditors committee (UCC) composed of seven members with digital assets tied up in Celsius. Three days later, the committee hired the law firm of White and Case LLP as legal counsel. Additionally, the committee took on M3 Partners and Elementus as its restructuring advisor and blockchain consultant, respectively.
The UCC has since crystallised its strategy for reclaiming unsecured creditors’ assets into a five-point plan that it shared with the community. The plan involves safeguarding customer assets, spearheading an inquest into Celsius’s activities, reorganising or selling Celsius’s assets to give creditors maximum value, and maintaining open communication channels with the broader Celsius community.
Bankruptcy Court Gives Celsius Go-Ahead to Sell Mined BTC
Another milestone in Celsius’s bankruptcy proceedings was the decision by the court to allow the crypto company to mine and sell BTC to fund its operations. However, the go-ahead was given with great reservation as parties in the proceedings, especially the Office of the U.S. Trustee, expressed reservations regarding Celsius’s financial transparency.
According to the Justice Department watchdog, Celsius had not made it clear what it intended to do with proceeds from the sale of BTC. Additionally, Judge Martin Glenn pointed out that he was unsure whether or not Celsius’s plan to sell off BTC from its mining operation would be profitable.
Celsius had earlier indicated through its lawyers that it would run out of funds by October because of increased debts and expenses associated with its BTC mining subsidiary. For this reason, the court felt that regardless of its reservations, it was worth the risk to allow the crypto lender to sell its mined BTC to stop the company from sinking deeper into debt.
Celsius Backs Away From Move to Hire Former CFO
It was not all positive news in the courtroom for Celsius. Severe criticism forced the company to abandon plans to rehire its former chief financial officer (CFO) as a consultant on a hefty short-term contract.
Celsius filed a motion with the Bankruptcy Court of the Southern District of New York on July 25, requesting permission to hire Rod Bolger in an advisory capacity. However, just a day before the motion was due to be reviewed, the crypto lender filed a notice withdrawing it.
Celsius investor Keith Suckno challenged the motion, alleging that the ex-CFO had given false statements regarding the company’s liquidity and overall financial health and was, therefore, unfit to make any contributions to the ongoing bankruptcy process.
Bolger had worked at the crypto firm for five months before resigning on June 30, three weeks after the company halted customer withdrawals and indicated it was struggling with liquidity issues.
U.S. Trustee Calls For Independent Examiner to Probe Celsius
In keeping with the theme of mistrust and lack of transparency surrounding Celsius, a representative of the Office of the U.S. Trustee called for an independent examiner to look into the company’s dealings.
William K. Harrington, in late August, requested for an examiner to probe allegations of incompetence and gross mismanagement made against the Celsius leadership. According to Harrington, Celsius had failed to provide adequate information regarding its liquidity, business model, cash flow, and the value of crypto assets in its custody.
An investigation by an examiner would hopefully present the company’s actual position tangibly and understandably, free from rumours, innuendo, and outright falsehoods that Harrington felt had plagued the proceedings so far.
However, the Celsius UCC did not share Harrington’s sentiment. It felt the move would only add unnecessary expenses to the already overstretched crypto lender.
Mashinsky Meets Celsius Team
And finally, on September 8, Celsius CEO Alex Mashinsky had an all-hands meeting with members of the Celsius management team. A recording of the meeting, sent to crypto enthusiast and Celsius unsecured creditor, Tiffany Fong, indicated that Oren Blonstein, head of innovation and chief compliance officer at Celsius, was also present.
According to a transcription of the recording, Mashinsky described Celsius’s chapter 11 proceedings as a “safe place” for the company as it would shield it from the travails of an impending crypto winter.
Mashinsky also predicted that more crypto companies would encounter similar liquidity problems as Celsius as inflation hit unprecedented levels in the coming months.
In the meeting, Mashinsky also outlined a three-step plan to get Celsius back on its feet. The plan’s first step involves returning deposits to the custody accounts and reactivating associated services such as lending, staking and swapping. The second part of the plan will be formulating a crypto-based solution for returning customer assets in the Earn program. And finally, the third part of Mashinsky’s plan will involve reopening Celsius’s services to the investing public.
According to Mashinsky, the reopening codenamed “Kelvin,” denotes that the new Celsius will require zero trust from its customers.
Oren Blonstein indicated that most of the recovery proposals made by the company were still being considered by the Celsius UCC, which is yet to give its feedback.