After a month full of speculation and uncertainty, centralised finance (CeFi) lending company Celsius Network has filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court in New York.
The news was met with despair among Celsius customers, who remained hopeful of retrieving the billions of dollars worth of funds held at ransom since Celsius froze withdrawals on June 12.
A voluntary petition filed on Wednesday July 13 cites over 100,000 creditors owed between US$1bln and US$10bln.
Cayman Islands-registered private equity firm Pharos Capital is listed as the largest creditor with an unsecured claim of over US$81mln.
Also present on the creditor list are technology companies The Caen Group and ICB Solutions, South African crypto exchange AltCoinTrader, tokenised fund Invictus Capital, Sam Bankman-Fried’s Alameda Research, and a litany of high-value customers.
“This is the right decision for our community and company,” said co-founder and chief executive officer Alex Mashinky.
But those words will likely fall on deaf ears to stakeholders, many of whom were convinced to hand custody of their digital assets over to Celsius by Mashinsky himself.
Influencers in the spotlight
Two weeks before Celsius placed a temporary — now likely permanent — freeze on withdrawals, Mashinsky took to YouTube channel InvestAnswers to rally against the FUD (fear, uncertainty and doubt) surrounding the platform.
The Fudders are “idiots” who “have nothing better to do” exclaimed Mashinsky.
“Don’t believe the FUD,” agred James Mullarney of InvestAnswers.
Celsius has “the framework and transparency” to let customers know if there is a problem, not to mention the financial backers, he gushed.
Want to make sure your crypto is stored safely for your loved ones? Give Celsius custody of your funds, they suggested.
So went the 45-minute interview.
Fellow bankrupt crypto lender Voyager had its own cheerleaders, not least billionaire entrepreneur Mark Cuban, who as a business partner with Voyager went on record calling it “as close to risk free as you're gonna get in the crypto universe”,
Cuban fans could also get US$100 of FREE crypto by usings the MAVS100 promo code!
Cuban in fairness stated that nothing in crypto is 100% risk free, while Mashinky and Mullarney’s interview came with the standard “not financial advice” caveat.
But customers who were drawn in by these and similar comments are now likely to return to them with a sense of dismay, particularly those sharing suicide hotline information over Twitter and the Reddit community.
“Who would be crazy enough to give their coins, their crypto, to somebody that’s not a bank?” Mashinksy once rhetorically asked an interviewer.
A story of Chapters
Celsius’ voluntary petition labels the business as “none of the above” on a list that includes a “commodity broker” option.
Source: stretto.com
Voyager did the same, which makes sense given that both entities have enlisted the same lawyer.
More than an arbitrary definition, this conscious decision could significantly influence how Celsius’ — and Voyager’s — bankruptcy proceeding goes down.
Instead of a Chapter 11, brokers are required to file for bankruptcy protection under Chapter 7, which exposes the debtor to the Securities Investor Protection Act (SIPA) thus putting customers at the front of the queue for repayments.
According to Washington D.C.-based law firm Wilmerhale, “a broker's customers stand to be affected less, and less adversely, by a broker's liquidation under the special bankruptcy and SIPA provisions” compared to a Chapter 11.
If @celsiusnetwork and @investvoyager cared about their users they'd file for SIPA bankruptcy as brokers (which they always claimed to be), where ALL proceeds go to customers first.
Filing for Chapter 11 is them saying EXPLICITLY that THE COMPANY OWNS ALL USER ASSETS. pic.twitter.com/FMDzmjRBZO
— Cory Klippsten (@coryklippsten) July 14, 2022
Since Chapter 7 forces businesses into bankruptcy, while Chapter 11 keeps the restructuring door open, it stands to reason why Voyager and Celsius want to take the latter route; a slim chance of saving their businesses would still exist, while users remain classified as unsecured creditors and have less claim to debt.
But here’s the pinch: Voyager was more than happy to call itself a broker in the past, in no less than nine press releases since 2018 in fact.
Celsius has shrewdly avoided the term, but with essentially the name business model, what sense would it make for Voyager to be deemed a broker but not Celsius?
Whether or not Celsius and Voyager will be forced to change to a Chapter 7 is unclear.
As reported by Retuers, the judge in Voyager’s case “questioned whether Voyager had even filed the right type of bankruptcy case, suggesting that it met the criteria for liquidating as a broker-dealer with protected customer accounts”.
If the courts decide to pursue this line, it could be bad news for Celsius but a glimmer of hope for customers.
As of 14:00 BST, CEL token was trading at US$0.62 with a market capitalisation of US$148.7mln.