UPDATE 1-Celsius Network selects NovaWulf bid for bankruptcy settlement

(Adds details from court hearing, background on crypto crash)

By Dietrich Knauth

Feb 15 (Reuters) – Crypto lender Celsius Network will file for bankruptcy under the guidance of asset manager NovaWulf Digital Management, which will take over operations of a new company that will be owned by Celsius customers, the company said in a court hearing. in Manhattan on Wednesday.

The proposed deal with NovaWulf would allow Celsius to exit Chapter 11 and begin returning crypto assets to customers in June, Celsius attorney Ross Kwasteniet said at Wednesday’s hearing.

Celsius chose NovaWulf’s bid from more than 130 proposals received, saying NovaWulf was the only finalist that intended to maintain long-term control of Celsius’ harder-to-liquidate assets, such as its loan portfolio and bitcoin mining operations.

Those assets will be owned by Celsius creditors and managed by NovaWulf under a profit-sharing agreement if U.S. Bankruptcy Judge Martin Glenn, who is overseeing Celsius’ Chapter 11 process, and the creditors sign off on the agreement.

Cryptolenders like Celsius flourished during the COVID-19 pandemic, attracting customers with the promise of high interest rates on their cryptocurrency deposits and the ability to borrow against cryptoassets. But many companies in the highly interconnected sector went bankrupt in 2022, fueled by a market crash in May and the implosion in November of a major crypto exchange, FTX.

Under the plan, Celsius customers with less than $5,000 in their accounts would be eligible to receive a one-time payment in bitcoin, Etherium or stablecoin USDC, according to court documents filed Wednesday. Celsius estimates that the option will be available to more than 85% of customers, giving them roughly 70% of the value of their deposits.

Celsius customers with more than $5,000 in their accounts will receive payments from crypto left over after smaller customer accounts are paid back, and will also receive equity in the new company.

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NovaWulf has agreed to pay up to $55 million to the reorganized company, dubbed “NewCo” by Celsius, which will be owned by Celsius creditors and will continue Celsius’ bitcoin mining and lending operations. NovaWulf will share in the new business’s profits, Kwasteniet said.

The new company will also pursue lawsuits stemming from Celsius’ collapse, including claims against former CEO Alex Mashinsky and other insiders.

Celsius creditors previewed their legal claims against Mashinsky and other insiders in a late Tuesday court filing, accusing them of siphoning millions of dollars from Celsius when it collapsed and causing billions in losses through their “negligent, reckless and self-interested” actions.

The creditors’ legal demands echo many of the findings of an independent bankruptcy examiner, who reported on Jan. 31 that Celsius used investor money and customer deposits to prop up its own token while two of its founders made millions of dollars from token sales.

New York’s attorney general has already sued Mashinsky for alleged fraud committed during his time as head of Celsius.

Mashinsky could not immediately be reached for comment Wednesday. A lawyer representing him has previously said he denies the charges and looks forward to defending himself in court.

Any proceeds from the post-bankruptcy lawsuit will benefit Celsius customers who take a stake in NewCo, Kwasteniet said.

New Jersey-based Celsius filed for US bankruptcy in July after freezing customer withdrawals. Celsius said at the time it had more than 1.7 million registered users and about 300,000 active users with account balances greater than $100. (Reporting by Dietrich Knauth in New York Editing by Alexia Garamfalvi and Matthew Lewis)