The aftermath of the Celsius saga: a domino effect we didn’t see coming

What began as an outcry against a well-known cryptocurrency exchange, Celcius, has led to a domino effect that has affected the entire crypto market.

What happens to foreign creditors?

Celsius, which filed for bankruptcy in July, has faced numerous legal issues regarding recovering its clients’ funds. In August, several creditors filed a complaint to recover over $22.5 million worth of cryptocurrency held in the firm’s custody service.

Due to the various difficulties that cryptocurrency investors have experienced this year, many insolvencies have occurred among crypto lenders. On July 13, Celsius Network, a crypto lender, filed for chapter 11 bankruptcy. The company cited the extreme market conditions for its decision to go through with the bankruptcy.

David Adler, on Twitter, has pointed out that in addition to the misrepresentation/fraud claims, there are Celsians in every state and foreign country, each of which has specific laws. Additionally, Celsius has specific conduct (refusal to honor withdrawal, involuntarily liquidations, etc.).

Earlier he has stated that Celsius investors should add all of their claims to the proof of claim form. This is because, depending on the country where they live, they may have different claims.

According to Adler, he has also been speaking with creditors who have had their positions in various companies, such as Nexo, liquidated due to Celsius’ failure to transfer their crypto.

Core’s profit margin shrank

The price of bitcoin has dropped from around $69,000 in November 2021 to around $20,500. That caused Core’s profit margins to shrink. The company’s competitors have also started to exert more pressure on it, and the rise in energy prices has impacted its operations.

In a statement, Core noted that the prolonged decline in the price of bitcoin and the increase in electricity costs have negatively affected its operations. The company also said that the increase in the global hash rate, which refers to the computing power of miners in the bitcoin network, has affected its liquidity.

The company also noted that it has been struggling due to the legal actions taken by Celsius Networks LLC. Before it filed for bankruptcy earlier this year, Celsius was one of the leading providers of crypto lending services. It offered investors annual returns of almost 19%. On the positive side, the fees Celsius charged for its legal actions against Core should decrease.

Despite the company’s efforts to sell all of its bitcoin in June, Core’s cash position has decreased to around $26.6 million. It also noted that it could run out of money by the end of the year. Despite its efforts to restock its coffers, Core still noted that it could run out of money by the end of the year.

Privacy and doxxing issues

In a recent court filing, Celsius Network revealed that its CeFi platform had exposed over 14,000 pages of customer data without their consent. That was a shocking reminder that privacy is not always protected.

In October, Celsius Network, a financial services provider, disclosed its customers’ personal information in a bankruptcy court filing. Although its users followed standard Know Your Customer procedures to open accounts with the company, none of them could have anticipated the scope and scale of this disclosure.

Before the company filed for bankruptcy, they revealed that Alex Mashinsky, its founder, and Daniel Leon, its chief strategy officer, had withdrawn millions of dollars from the company. The disclosure also prompted many CeFi users to rethink their privacy protections.

The mass data dump by Celsius Network suggests that the company’s distrust of authority and transparency is not limited to just one organization. There are a lot of gray areas when it comes to the intersection of law and on-chain finance. Due to the rapid emergence and evolution of the blockchain industry, the conflicts and disputes generated by this sector have not been resolved by established case law or legislative frameworks.

Despite the significant changes that have occurred in the legal landscape in the blockchain industry, courts are still not prepared to uphold the standards of the on-chain domain.

So, what has the Celsius saga done to the crypto market?

Monsur Hussain, a senior director at the rating firm, said that liquidating Celsius would lead to a wider spread of negative effects within the cryptocurrency industry.

Celsius, a decentralized financial institution, has various assets in the DeFi world. One is the staking ether, which promises users rewards on deposits. According to Omid Malekan, an instructor at Columbia Business School, if the company goes into liquidation, it would have to sell these assets.

Well, for starters, it’s caused confusion and uncertainty. People don’t know who to trust, so many are pulling their money out of crypto altogether. That is causing the market to crash, and it doesn’t look like it will recover soon.

Cracks in the lending sector

Celsius was one of the platforms that allowed companies to park their cash with Anchor. That was a major factor in the cascade of failures that occurred after the collapse of the UST project.

According to financial expert and Bitcoin Layer founder Nik Bhatia, companies must find ways to source yield, often moving their assets into risky instruments.

According to analyst Prashant Bhatia, the company’s $1.2 billion balance sheet gap was caused by its poor risk models and the collateral sold off by its lenders. He also noted that the company lost its customers’ deposits due to the UST project’s failure.

The cracks in the lending sector of the crypto market are not the only ones. According to Carter, the various factors that have affected the industry include the increasing number of banks and investors withdrawing their liquidity, the tightening of underwriting standards, and the testing of solvency. He noted that this has the potential to drive up yields.

Final thoughts

As you can see, the ripple effects of Celcius are far-reaching and have caused domino effects in the crypto world. Celsius’ collapse is the latest in a series of CeFi industry bankruptcies. While the platform’s billion-dollar deficit in bankruptcy filings is less than the norm, it is still significant.