The Celsius Network was created during the cryptocurrency movement by founder and CEO Alex Mahinsky. Which made it the largest centralized platform on the market. Celsius offered returns on various cryptocurrencies and acted primarily as a hedge fund.
However, for the past few weeks, the platform has been the talk of the town for all the wrong reasons.
Recently, Celsius filed for Chapter 11 bankruptcy last week, which was no surprise to many who saw it coming.
2021 Status
Celsius had established itself as one of the biggest names in cryptocurrency lending. Reaching great heights in October 2021 when Mahinsky claimed to have $ 25 billion in assets under management.
Despite the cryptocurrency’s declined value in May, Celsius still had $ 11.8 billion in assets under management. The company also had another $ 8 billion in customer loans.
2022 Status
Celsius currently has $167 million in cash on hand. Which will provide “sufficient liquidity” during the restructuring process. While the company continues to operate.
According to the bankruptcy filing, Celsius owes users $4.7 billion in addition to its balance sheet’s $1.2 billion gap. Furthermore, Celsius filing for bankruptcy is the third major bankruptcy within the crypto ecosystem in a short time.
The company’s predicament could also portend a significant collapse in the broader crypto ecosystem. Spell the end of customers racking up double-digit annual returns.
Regardless, Celsius’ promise to integrate new users contributed to its downfall.
Read also: Investors at a Loss as Billions of Crypto Remain Frozen in Crypto-Lending Platforms
Factors leading to bankruptcy
One of the company’s biggest problems is that the promise of a 20% annual return was not real. Leading to allegations that Celsius had a Ponzi scheme. In which the company used new users’ money to pay new depositors.
Celsius also invested money in other platforms that offered similarly high returns to keep its business model alive.
News agency The Block noted that Celsius had invested at least half a billion dollars in Anchor. The flagship lending platform of the now defunct TerraUSD stablecoin project.
Celsius previously promised users a 20% annual return on their UST assets.
Additionally, the company was one of the platforms to park its money in Anchor. Which led to a series of major bankruptcies following the UST implosion in May.
“They always have to source yield,” noted Nik Bhatia. Founder of The Bitcoin Layer and part-time finance professor at the University of Southern California. “So they move the assets around into risky instruments that are impossible to hedge.”
Referring to Celsius’ $1.2 billion hole in its balance sheet. Bhatia alluded to shaky risk models and the upselling of collateral by institutional lenders.
“They probably lost customer deposits in UST,” Bhatia suggested. When the assets go down in price, that’s how you get a ‘hole. The liability remains, so again, poor risk models.
Read also: Meta to Pull the Plug on Crypto Project in September
Who qualifies for a refund?
Although Celsius halted all withdrawals due to “extreme market conditions,” the platform continued to tout an annual return of almost 19% for three weeks (and a few days before the company filed for bankruptcy protection).
“Transfer your crypto Celsius and you could be earning up to 18.63% APY in minutes,” the site wrote in bold on July 3.
Celsius’ promise attracted new users, with 1.7 million customers in June.
According to the bankruptcy filing, Celsius has more than 100,000 creditors, some of whom have lent money to the platform without collateral to support its business.
The list of unsecured creditors includes Sam Bankman-Fried’s Alameda Research and a Cayman Islands investment firm; creditors will likely be the first to receive their money.
Customers trying to access their accounts and withdraw cryptocurrencies face major difficulties after Celsius said that account operations would be pause until further notice and that it would not request client withdrawal authorisation.
It is also unclear whether the bankruptcy process will allow customers to recover losses.
Compared to traditional banking systems that guarantee customer deposits, Celsius does not offer consumer protection to safeguard user funds in times of crisis.
Additionally, Celsius has clarified in its Terms of Service that all digital assets transferred represent a loan from you to Celsius without any guarantee from the company; Client funds were essentially unsecured loans.
The company also warned in its terms of service that in the event of bankruptcy, “any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable,” giving customers no legal rights or remedies with the firm’s obligation.
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