Analysis: Clients of cryptocurrency lender Celsius face a long wait due to the fate of their funds

WASHINGTON / LONDON, JULY 15 (Reuters) – Crypto lender Celsius’s customers face a long and anxious wait to know how, when and even if they will get their money back after the company filed for bankruptcy, and became one of the biggest victims for collapse in the crypto markets this year.

Referring to extreme market conditions, Celsius froze withdrawals in June in a move that resonated throughout the cryptocurrency world and beyond, spurring $ 300 billion in digital asset sales, leaving legions of retail investors cut off from their savings.

Celsius Network, based in the US state of New Jersey, revealed a gaping gap of $ 1.2 billion in the balance sheet when they filed for Chapter 11 bankruptcy in New York this week. read more

Clients should now brace for a bumpy ride while waiting for some clarity on the fate of their money, six lawyers specializing in bankruptcy, restructuring or crypto told Reuters.

With few precedents for bankruptcy in large crypto companies, the prospect of more lawsuits against Celsius, as well as the high complexity of any restructuring, the Chapter 11 process will probably be slow, the lawyers said.

“This can last for years,” said Daniel Gwen of Ropes & Gray Law Firm in New York. “It is highly likely that there will be many lawsuits.”

Celsius did not respond to requests for comment.

Crypto-borrowers flourished during the pandemic, attracting private customers with double-digit rates rarely offered by traditional banks, in return for their crypto-asset deposits.

On the flip side, institutional investors like hedge funds paid lenders higher interest rates to borrow the coins so companies like Celsius could profit from the difference. Lenders also invested in more risky, so-called decentralized financial markets.

‘THREE-DIMENSIONAL CHESS’

As crypto markets fell this year as rising inflation rates triggered an escape to safer assets and two major tokens – terraUSD and luna – failed, the more risky bets from lenders in wholesale crypto markets were soured.

The American crypto lender Voyager Digital (VOYG.TO) also filed for bankruptcy this month after suspending withdrawals and deposits, while the smaller Singapore lender Vauld and Hong Kong-based Babel Finance have also frozen withdrawals.

Chapter 11 bankruptcies allow companies to prepare turnaround plans while they remain in operation.

While large crypto companies have failed before, especially the Japanese stock exchange Mt. Gox in 2014, there is little precedent for treating customers of affected crypto borrowers, the lawyers said.

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

Creditors’ committees formed as part of the bankruptcy process will probably try to shape any reorganization plan determined by Celsius, said three lawyers. Creditors can also make claims against the company even when it goes through the process.

“It will probably take, given the complexity, at least six months, just to develop a plan to get out of bankruptcy,” said Stephen Gannon, partner at Davis Wright Tremaine. “This is going to be three-dimensional chess.”

In general, Chapter 11 bankruptcies prioritize repayments to secured creditors, then unsecured creditors and then shareholders.

“(Unsecured creditors) have no earmarked rights to any funds or anything, everything has been mixed up,” Van Horn said. “Sometimes there is a very small amount that unsecured creditors get.”

‘LAST ON THE LIST’

Celsius said in court documents this week that they had more than 100,000 creditors.

As of July 13, it had around 23,000 outstanding loans to private customers worth 411 million dollars, supported by crypto-security worth 766 million dollars, it was stated in an archive on Thursday.

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

One of them is Martin Jabou, 27, who lives in Hamilton, Canada. He put cryptocurrencies worth around $ 45,000 in Celsius, even though they are now worth less than half that.

I think we are last on the list, he said about any repayments from bankruptcy. “I do not know how to afford rent or car payments, especially with the other debt I have.”

Crypto-borrowers like Celsius acted in the same way as banks. But unlike regular lenders, there is no safety net for people like Jabou when crypto platforms fail.

With US banks, deposits of up to $ 250,000 are insured by a federal agency. 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 EU and the UK.

Although it is not clear how Celsius will classify its clients, it warned clients that they could treat them as unsecured creditors – and clients are likely to sue over such a status, said Max Dilendorf, a New York lawyer who specializes in crypto .

“It will be a unique case to see why customers should be classified as unsecured creditors,” he said.

Reporting by Tom Wilson and Elizabeth Howcroft in London and Hannah Lang in Washington; Edited by David Clarke

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