Celsius’ situation is getting worse. What is the next? Bankruptcy?
Another crisis is ravaging the digital asset sector a month after the collapse of Terra stablecoin sent the market plummeting, generating new apprehension among all cryptocurrencies. On Sunday, Celsius Network Ltd., one of the world’s largest cryptocurrency lenders and a key player in decentralized finance, announced that it was halting withdrawals, exchanges and transfers.
The decision follows weeks of uncertainty over its ability to achieve the unprecedented returns seen on some of its products, including rates as high as 17%.
Celsius Withdrawal Freeze Is Crypto And The Latest Crisis
The collapse is the most recent setback of the cryptocurrency market and the DeFi ecosystem. Although Celsius is a centralized platform that sets it apart from DeFi, its extensive involvement in the sector, including investing in Terra and various risky strategies intended to create significant returns that it could then pass on to its clients, has heightened concerns about its viability.
Towards the end of May, blockchain analytics firm Nansen fueled speculation that Celsius was partly responsible for the collapse of TerraUSD. After the failure of the $60 billion stablecoin firm Terra, crypto investors fear that the possible demise of Celsius could cause even more damage to a market already in uncertain territory after several crypto winters.
Investors, much like the Terra Collapse, are taking no risk. Ben Armstrong, a crypto YouTuber, has announced plans to file a class action lawsuit against the lending platform and its CEO. BitBoy is the second most subscribed crypto YouTube account. It has over 1.45 million subscribers and focuses on market news/trends content.
The company is experiencing serious liquidity problems due to the slowdown in the cryptocurrency market, with its shares having fallen about 13% since the start of the year. On Monday, withdrawals were halted and around $320 million in assets were moved to pay off debts and avoid liquidation on decentralized finance (DeFi) platforms like Aave.
According to reports, Celsius has hired restructuring lawyers from Akin Gump Strauss Hauer & Feld to research potential solutions to its financial problems. However, Armstrong says companies hire these lawyers primarily to prepare them for bankruptcy.
In terms of recovering funds from Celsius, there seems to be a potential option for users with less than $25,000 in assets on the platform to get their money back soon. On Wednesday, Joshua Browder, founder of robot lawyer DoNotPay, posted a step-by-step procedure for recovering money:
The Celsius mess took the leading position completely by surprise, and no timetable or strategy to fix it was revealed. Many experts believe that the fallout from the Celsius crisis will be limited to bitcoin.
What’s next for the beleaguered network?
While it’s unclear whether Celsius is on the verge of bankruptcy, the firm offers “annual percentage returns” (similar to traditional account annual interest) for crypto deposits of around 19%. It is not an FDIC insured institution. This lack of registration could result in customers becoming unsecured creditors. This could lead to massive withdrawals and liquidity issues.
However, Celsius’ filing for bankruptcy would trigger the “automatic stay”, which would prevent creditors from pursuing collection efforts against the company.
Meanwhile, rumors swirled about possible tensions at Three Arrows Capital, a leading hedge fund, following a vague tweet from its founder Zhu Su on Tuesday night, adding to market concerns. According to media reports, Three Arrows said it was working out how to repay lenders and other counterparties after major market lenders liquidated it.
Three Arrows, a major player and one of the best-known hedge funds in the crypto world, is believed to have around $10 billion in assets under management, according to Bloomberg, citing data from Nansen. According to a December 2020 regulatory filing, the company owned more than 6% of the Grayscale Bitcoin Trust, the largest bitcoin fund in the world.
The skepticism has only deepened the bitcoin crunch, which is currently trading nearly 70% below its November all-time high. Some market participants are concerned about the contagious risks Celsius and Three Arrows Capital could pose to the cryptocurrency industry if they go bankrupt in the worst-case scenario.
Terra’s collapse and recent reports of Celsius and Three Arrows could harm the institutional investor confidence in the cryptocurrency industry.
Blockchain-based cryptocurrency lending has come under regulatory scrutiny, with BlockFi agreeing to pay $100 million in penalties this year to settle charges from the U.S. Securities and Exchange Commission and other authorities that he illegally provided a service that pays customers high interest rates to lend their digital tokens.
Celsius Network users come to an unpleasant conclusion amid reports of bankruptcy. Users may never be able to get their money back if the crypto lender goes bankrupt. In bankruptcy proceedings, unsecured creditors often have to wait at the back of the line, implying that Celsius crypto funds could be used to pay off other creditors first.
Deposit insurance is available to retail banking customers in many countries. Customers of a US bank, for example, are protected by the Federal Deposit Insurance Corporation (FDIC), a US government agency. When a bank fails, the FDIC comes to the rescue of customer funds up to $250,000 in value.
A financial institution that issued cryptocurrency-denominated loans is on the verge of bankruptcy. However, its revival will come from the revitalization of the crypto market. Adam Levitin took to Twitter to offer investors an explanation of their risk.